Reform the welfare system

According to a government proposal for a budget of 387 trillion won ($331.5 billion) for next year, about 13 percent or 50 trillion won will be raised through debt. This would raise the debt-to-gross domestic product ratio to 40.1 percent next year compared with 31.2 percent in 2009. The government assures the public that the ratio is relatively low compared to the average for OECD countries. But the government is also responsible for the rising debt held by public institutions and the debt in the public pension systems arising from increased longevity.

The budget for health care, welfare and labor will increase by nearly 70 percent to 123 trillion won in 2016 from 75 trillion won in 2009. Universal welfare benefits including basic allowances for senior citizens have expanded 48 trillion won during the same period, producing a deficit of nearly 50 trillion won. The political wrangling over universal welfare benefits has not been resolved and the cost of welfare is increasing due to aging of the population and the low birth rate. Without reforming welfare spending, public finance, especially debt levels, will only worsen.

When the economy improves, tax revenue will increase and the debt ratio could fall. But prospects for the economy are poor. Deficit-financed spending could help spur consumption, but does not necessarily revitalize the economy. In the past, debt-financed expansionary spending mostly went into infrastructure projects that created work and profit for companies and stimulated the economy. But social overhead capital in next year’s budget is lower than before. The deficit is being incurred for spending that will only increase the interest burden. The government is getting itself into a debt snowball. Once the U.S. raises its short-term interest rate, the interest burden will get heavier for the government due to the gap in interest rates.

Demand for welfare will inevitably surge due to demographic factors such as aging and the low birth rate. Yet the working population paying into the system is declining. Because the working class cannot afford higher taxes, the fiscal deficit will widen. Increased universal welfare programs since 2009 have not helped to ameliorate conditions for the poor or reduce the poverty rate, but they did increase benefits for the better-off population. Our welfare structure must be realigned.

First the welfare system for the elderly must be redesigned to save costs and enhance sustainability. People are living longer. The legal retirement age is rising to 60. Work must be available to older people according to their health, their will to continue working and their capabilities.

Second, welfare benefits for the poor must work effectively and systematically to help them climb out of the pit of poverty. Public education standards must be upgraded so that poverty is not handed down from one generation to the next. The welfare sector must be enhanced in terms of efficiency. Social welfare must be accompanied with the latest technologies including telemedicine services.

Third, the social security system needs to be reformed to be oriented towards quality than quantity. The national health insurance system draws a government subsidy tantamount to 20 percent of insurance premiums despite its accumulated surplus of 16 trillion won. The national pension fund, which is expected to run out of reserves by 2060, generates an earnings ratio of 1.8. One refers to payout against contributions and the rest 0.8 needs to be covered by tax funds. Social security needs to be separated from the government and investment in private insurance should increase to supplement the public health system.

This is no time to boost welfare spending and drive economic growth at the expense of an ever growing deficit for Korea. It would be wiser to rationalize welfare spending and accelerate reforms in labor, finance, and the public sector to raise competiveness and productivity to stimulate sustainable growth.

Translation by the Korea JoongAng Daily staff.

The author is an economics professor at Konkuk University.

by Kim Won-shik