Korea’s national debt totaled 774 trillion won as of the end of last year, according to a report submitted to the National Assembly by the Ministry of Strategy and Finance.
The figure is about 354 trillion won higher than the 420 trillion won estimated by the ministry last month. The difference was caused by a shift in accounting method.
Previously the government calculated national debt based on cash accounting, a method that recognizes expenses at the time when cash is paid. Under this approach, potential debt, such as pension liabilities, is not included in national debt as the payment will be made in the future.
The latest debt figure was based on accrual accounting, which records financial transactions as they occur. This method recognizes expenses before cash changes hands. Thus the new debt includes the government’s future pension obligations to civil servants and soldiers, which totaled 342 trillion won.
Accrual accounting is widely used by large corporations as it enables them to grasp their financial position and operating efficiencies accurately. The International Monetary Fund recommends that governments prepare their financial statements based on this method.
As in the case of many eurozone countries, the adoption of the accrual approach increased national debt sharply. Yet not even the new figure includes all the obligations that the government has to shoulder.
For instance, it excludes the debt of state-run companies, which totaled 272 trillion won last year. These firms’ debt should be included in national debt as it was incurred due to the national projects they carried out on behalf of the government.
The adoption of accrual accounting may be uncomfortable for the government. This method, however, allows it to grasp the true picture of its financial status.
If all pension liabilities and potential debt are included, national debt easily exceeds gross domestic product, which stood at 1,237 trillion won last year. This means the nation does not have the luxury of introducing new welfare programs that increase fiscal spending.
The new accounting approach has also brought home the need to reform the civil service pension program, which is overly generous compared to the National Pension Scheme.
For NPS subscribers, the government has continuously lowered the benefit replacement ratio and raised the eligibility age to prevent the pension fund from being depleted too early.
But for the civil service pension program, it has not taken such measures. As a result, a retired civil servant receives a pension more than twice the amount given to an NPS beneficiary with the same length of work experience.
