A special committee of the National Assembly to reform pension systems held its first plenary meeting Tuesday.
The ruling and opposition parties had agreed to create the ad hoc committee in July to discuss plans to replenish four fast decreasing public pensions -- the national, government employee, military and teachers’ pensions.
The severity of pension problems is too well known. According to the Ministry of Health and Welfare’s fourth forecast of pension reserves, announced in 2018, the national pension is to be exhausted in 35 years, in 2057. National pension contributions -- the percentage of salary contributed to pension reserves -- is fixed at 9 percent for 24 years from 1998. Some experts argue it should more than triple for the pension to make ends meet.
Even this estimation is based on an optimistic demographic outlook. Other countries that introduced public pensions earlier than South Korea have experienced rapid depletion of reserves, but the country’s conditions are much worse than those of other countries.
Among other factors, South Korea's low birthrate and superaging society are serious. The birthrate sank to 0.81, the lowest among the world’s advanced economies, in 2021.
At present, Korea’s old-age dependency ratio -- the population aged 65 and over per 100 working-age people -- is 25, but this figure is expected to surpass 100 in 2070.
The declining population and the rapid aging of baby boomers puts the country under heavy pressure on public pensions.
If pension reserves run out, the government will have to spend an astronomical amount of its budget in order to sustain public pensions -- particularly government employee and military ones whose deficits are covered with tax each year. The government and the National Assembly must work out reform plans without fail this time.
The problem is that politicians are reluctant to touch politically sensitive pension issues. They perceive pension reform as belling the cat. The basic direction of reform is already set: to increase contributions while reducing payments. Naturally, this is unpopular.
This is why the previous administration of President Moon Jae-in rolled up its sleeves in its early days to reform pensions then sat furtively on its hands.
President Yoon Suk-yeol pledged pension, education and labor reforms, and it may feel immense pressure to carry them out. After the ruling and opposition parties agreed to create the special committee in July, he effectively withdrew his pledge to create a presidential committee for pension reform. It remains to be seen whether this is a retreat of reform.
Fortunately, current conditions are conducive to the operation of the special committee of the National Assembly. No elections will be held until the April 2024 general elections. Politicians are reluctant to deal with pension reforms once the election season begins. If the committee fails to achieve results this time, however, public pensions will face trouble fairly soon.
Contributions were 3 percent of salaries in 1988 when the national pension was launched. It rose to 9 percent in 1998 as a result of the first reform. Its replacement ratio, which can be described as the projected monthly pension at retirement divided by the projected monthly salary at retirement, fell from 70 percent in 1988 to 43 percent this year.
National pension contributions have increased while pension payments decreased, and yet it is still far short of replenishing pension reserves. The birthrate is falling fast, aging is accelerating and growth is slowing.
If pensions are reformed late, the reform will be painful. There is no free lunch or magic wand in replenishing fund reserves.
Losing the timing of reform would mean that future generations are sacrificed for present generations. The special committee is to operate until April next year. It can extend that period, but it will be more difficult to reform pensions when general elections draw nearer. It must work out a compromise plan within the period.
