Let the national pension stay afloat

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Let the national pension stay afloat

Published: 28 Aug. 2024, 20:16

Park Sun-young
The author is an economics professor at Dongguk University.

The reserve fund of Korea’s National Pension Service (NPS) has topped the 1,000-trillion-won ($750-billion) milestone. The trove is the third largest in the world and the largest in terms of its share against the GDP. The momentum calls for a look back on the history of the successful pension scheme responsible for the minimum old-age security for 22.5 million subscribers.

According to the Public Pension Chronicle published by the NPS in 2015, a universal pension scheme was pioneered by a platoon of economists behind the industrialization and modernization drive in 1972.

Kim Man-je, the first director of the Korea Development Institute (KDI), submitted a report expounding on the need for a national pension system to the president on Nov. 30. President Park Chung Hee immediately ordered a task force to study the project. In his New Year’s address in January 1973, the president announced a plan to introduce the system in the following year. The campaign fast-tracked to meet the tight schedule. The National Welfare Pension Act was passed by the National Assembly on Dec. 1, 1973 but was held off due to the first global oil shock which caused more than a four-fold jump in oil prices. Insurance charges were certainly harsh for both employees and employers.

The following Chun Doo Hwan government was reportedly negative about the idea at first. The KDI pitched “creating a welfare state” in the first cabinet meeting, but the president didn’t show any response. Despite the cold shoulder from the president, government officials and experts repeatedly made the argument. Chun was finally won over by Kim, the former KDI chief recruited as the deputy prime minister responsible for economic policy planning, and SaKong Il, the senior presidential secretary for economy, on April 21, 1986. On Aug. 11 that year, the government announced the national pension agenda as the keystone of its welfare policy and approved a revision to the National Welfare Pension Act.

This was possible because government officials and experts prepared well for the project. In December 1986, the act shelved for more than a decade was passed as the National Pension Act to implement the pension scheme from January 1988. It took 14 years to bring the national pension policy into the world.

But the implementation went through trials. The scope started with workplaces with 10 or more employees in 1988. It was expanded to include workplaces of five employees or more in 1992, residents of rural communities in 1995 and workplaces with fewer than five employees and the self-employed in urban areas in 1999. It took nearly a decade for the system to become truly “national.”

The process of expansion was also bumpy. The inclusion of the self-employed was met with fury by salaried workers, who threatened to boycott payments and demanded a separate pension system for themselves, citing the apparent discrepancy from an unclear tax base for farmers. It became a red-hot political issue ahead of the by-elections in March 1999 and the parliamentary elections in 2000. But Prime Minster Kim Jong-pil, who had learned how difficult it was to pursue pension once it was put on hold under the Park Chung Hee regime, argued strongly to push ahead with the original plan in a tête-à-tête with President Kim Dae-jung. The two Kims decided not to delay including the self-employed in the pension despite the political risk of losing votes.

The national pension started favorably toward retirees, charging a premium rate of 3 percent and offering an income replacement ratio of 70 percent. The pension system was far more generous than any private pension schemes. Their returns were guaranteed by the premiums to be charged on the younger generation. Rhyu Si-min, the health and welfare minister under President Roh Moo-hyun, pointed out that while the reserve fund reached 180 trillion won as of 2006, the unfunded liabilities amounted to 210 trillion won. “The debt adds 80 billion won everyday and 30 trillion won a year,” he said to raise the alarm on the sustainability of pension.

According to the Bank of Korea, the first baby boomer generation born between 1955 and 1963 numbering 7.05 million have fully passed the retirement age of 60 last year. The second baby boomer generation born from 1964 to 1974 totaling 9.54 million will join the retirement group over the next 11 years. The presidential office will soon announce the outline for the NPS reform. The country’s universal pension scheme matured well since its conception in 1972 thanks to devoted parenting by numerous politicians, bureaucrats, civilian groups and experts. We have a duty to pass on the legacy to the future generation.

Translation by the Korea JoongAng Daily staff.