Urgent pension reform
Proper approaches needed to extract consensus
It is much harder to give people something and take it back ― even in part ― than not to give it in the first place. That explains why pension reform is so difficult, and all past governments have tried but failed.
President Yoon Suk Yeol has also selected the matter as one of his three key reform targets, along with labor and education.
In conclusion, however, the outlook does not seem very positive.
There is a goal but the reason to pursue it is misguided and how to attain it is nonexistent or uncertain. First, the government's objective is leaning too far to one side ― replenishing the pension fund to keep it from drying up as long as possible.
A report by the Korea Economic Research Institute under the Federation of Korean Industries a year ago fanned concerns about the fund's depletion. "If we maintain the current system, people born in 1990 qualified to receive a pension in 2055 will receive nothing," said the five-page news release issued by the think tank of the chaebol lobby group.
According to experts, however, only Korea and four other countries ― the U.S., Canada, Sweden, and Japan ― give pensions from accumulated funds. Others, including Germany, operate their pension system on an "imposition basis" without funds. Korea's s pension fund exceeded 900 trillion won ($720 billion) in 2021 and will likely surpass 1,000 trillion won this year, nearly 50 percent of the gross domestic product, the top level worldwide.
The reason for the pension system ― and why it must be reformed ― should be the guarantee of security in old age. Out of concerns about the fund's depletion, Korea slashed payment in 2007 and reduced it gradually each year. If things continue, the number of pensioners will increase, but the pension money will be negligible. Even now, Korea's elderly poverty rate is highest in the OCED. Nothing shows this better than numerous older adults collecting paper boxes and carrying them by handcart ― after working throughout their life.
Many Korean media outlets cite the example of France, praising President Emmanuel Macron and his bold pension reform efforts. The French leader is trying to increase the retirement age by two years to 64, and letting people work longer (receiving a pension later). However, without proper vocational training and other career-changing education, the reform will end up as just a far longer and deeper "income crevasse," which is why French labor unions scheduled a national protest rally tomorrow. This is happening where the pension's income substitution rate reaches 70 percent compared to Korea's 30 percent.
One should learn from advanced countries but make a suitable model first.
The problem is how to raise the premium rate. Paying more and receiving more is the best approach, which experts say is possible in Korea, too. Policymakers here could learn from their Japanese counterparts. The neighboring country, which became an aged society far earlier than Korea, reformed its pension system as early as two decades ago.
Japanese leaders took three approaches to do so ― changing perceptions among people through national discussions, making decisions transparently and easing uncertainty gradually. "Pension is not a saving but an insurance," a Japanese expert says. "If your premium rate rises, just think you gave more spending money to your grandchildren or great-grandchildren."
Pension reform is a vast and complicated task covering several generations. It's already too late for Korea to delay it any longer. And any reform should begin ― and end preferably ― in the early years of the new government.
As a candidate, Yoon said he would activate a presidential committee to reform the pension system. After the election, he did not do so but passed the matter to the National Assembly. The president now says Koreans will see the "finished product" by 2027.
Many doubt it. Any half-baked plan, including premium rate hikes, will go nowhere if employers and employees oppose it around the parliamentary elections next April. And Korea will be later than Japan by more than two decades in making this vital reform.
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