Parties agree on pension reform bill

The reform bill for civil servants’ pensions will be put to a vote at the National Assembly this Wednesday, but Cheong Wa Dae and the government say the deal has not gone far enough to address shortfalls in the nation’s pension funds.

The ruling Saenuri Party and the main opposition New Politics Alliance for Democracy on Saturday agreed to raise the contribution rate of public service pensions from the 7 percent to 9 percent in the next five years, while reducing entitlements from 1.9 percent to 1.7 percent in stages over 20 years.

But they also agreed to increase payouts from the national pension system, a different government-run pension scheme for the general public.

The agreement would raise the nominal income replacement rate ― the percentage of a subscriber’s annual income that is paid out each year on retirement ― to 50 percent from the current 40 percent. This means an employee would receive about 50 percent of his annual income as a pension after reaching retirement age.

If the bill passes, public officials will be required to pay more in premiums while in service and receive less in payouts after retirement.

The parties predict that some 333 trillion won ($309 billion) would be saved in the next 70 years thanks to the reform plan.

Under the revised system, a public servant who worked for 30 years with an average monthly salary of 3 million won will have to pay 270,000 won in monthly premiums, which is 60,000 won more than before. After retirement, the official will receive 1.71 million won in monthly payouts, which is 180,000 won less than in the existing scheme.

According to the parties’ agreement, 20 percent of the funds saved from the civil servants’ pension reform will go toward the national pension fund. This is designed to help pay for the increased payouts in an effort to combat senior poverty.

But even with this injection, the government will still need to find more money to cover the costs of increasing national pension benefits, either through taxation or by raising premiums. The Welfare Ministry predicts that Koreans would need to spend an average of 18 percent of their income on national pension premiums to fund a 50 percent income replacement rate. Currently, 9 percent of incomes go toward national pension premiums.

Welfare Minister Moon Hyung-pyo on Saturday visited Saenuri Party leader Kim Moo-sung to complain the parties’ decision to increase the nominal income replacement rate of the national pension, claiming they exceeded their authority. Cheong Wa Dae also reportedly complained to the ruling party about the same matter.

“We estimate that at least 70 trillion won is needed to raise the nominal income replacement rate (of the national pension) to 50 percent, regardless of inflation,” Moon told reporters. “The cost (of increasing the income replacement rate) may exceed the funds saved from the civil servants’ pension reform.”

According to the National Pension Research Institute, the number of national pension recipients will exceed that of those paying into the scheme by 2060, as the senior population is grows and the nation’s fertility rate remains low. The Welfare Ministry also predicts that the national pension fund will be completely depleted by 2060.

Amid Cheong Wa Dae’s growing concerns, the leaders of the rival parties agreed to establish a task force to improve the current government-run pension system, which has been ridden with growing deficits as the elderly population rapidly increases. A special National Assembly committee will be formed to draw up a relevant bill to be passed by September.

By Claire Lee (dyc@heraldcorp.com)