Pension time bomb ticking

Politicians have mastered the art of “can’t lose” politicking. While feigning to exercise bipartisanship to overhaul the government employees’ pension program, what politicians ended up bringing to the table was the universal national pension policy. Their bargain deal to raise the national pension’s payout ratio from 40 percent to 50 percent of what subscribers earned during their working years, while dutifully paying the monthly premiums, has silenced a public disgruntled over delays in reforming the government employees’ pension scheme. Who would say no to more in their payout check? A person who earned 1 million won ($920) a month, would get 500,000 won instead of 400,000 won. The main opposition party assures us the premium rates would go up just 1 percentage point. But taxpayers must not be fooled. There is a huge catch in this math. There will be nothing left in the national pension fund by 2060. From then on, the pension system must be shifted to pay-as-you-go mode as done in some European countries by digging into current workers’ contributions and taxes to support the retired population. Can the transition be that simple?

The national pension fund will reach 500 trillion won this year. At the current growth pace, the fund could expand to 2,561 trillion won. But if we pay less and get more from pensions, the fund will be dry by 2060. With 1,500 trillion won, the entire stocks on local bourse could be bought. Unless local financial markets expand more than fivefold, the national pension fund will continue to gobble up Korean stocks, bonds and real estate over the next 28 years.

After 2044, the current changes entirely. The fund would have to start selling off its assets to pay pensions. If the fund pours out all its stock, bond and real estate holdings, it will wreak havoc on the asset market.

The catastrophe could be avoided by delaying the drain in the fund pool to phase out the shock. If the pension pays more than it collects as it would under the opposition party’s scheme, we will run out of funds sooner. Unless we have a magic wand, we must settle for paying more and receiving less.

The situation is not entirely hopeless. For the next 28 years, the pension fund will balloon. This is our golden hour. We must manage the fund well. An extra 1 percentage point yield in the pension fund would delay its depletion by five years.

The national fund is operated in the same manner as it was when it started with 30 trillion won in 1998. It is as if a village mom-and-pop store owner were running Samsung Electronics. A committee of 20 manages the fund. The chair is the health and welfare minister. The other 19 also are no financial experts. The minutes of the committee meetings suggest their financial expertise. Most are not even familiar with basic investment terms like exchange hedges or short selling. The committee is supported by a group of 150 traders and experts that actually run the fund. The business headquarters will be moving to Jeonju, North Jeolla, in the latter half of next year. It is uncertain how many will stay when they are asked to work in a local place receiving a paltry salary compared to what they could earn from a private investment bank.

It is also getting more and more difficult to raise the profit yield. The cumulative annual rate of return of the national fund since 1988 was 5.9 percent. Profit was mostly made during the period when interest rates hovered above 10 percent and the real estate market thrived. A yield of more than 5 percent is unthinkable today, when the fund is mostly parked in the bond market at a time when the interest rate is below 2 percent.

To improve profits, the fund must invest more in stocks and real estate. When the fund manages more than 500 trillion won, it must invest some overseas. There won’t be much stocks and bonds for the fund to buy at home anyway and also it must consider the market repercussions when it needs to sell the assets.

The government and legislative know what kind of situation the fund is in. There was a proposal to spin off the managing headquarters from the fund as an independent public corporation. But the move to overhaul fund management has stopped now that the focus is entirely on raising the coverage ratio to 50 percent.

The health ministry has put off the debate on the topic that had been scheduled for later this week. But during all this time, the time bomb goes on ticking. Will the government and politicians learn only when the bomb explodes?

JoongAng Ilbo, May 18, Page 34

*The author is the business news editor of the JoongAng Ilbo.

by Jung Kyung-min