Learning pension reform from Germany

The Moon Jae-in administration avoided the thorny issue of labor and pension reform while Germany became a model example of overcoming serious pension crises through courageous reform.

Kim Sang-ho The author is a professor of Gwangju Institute of Science & Technology and former head of the Korea Institute for Health and Social Affairs.

The Moon Jae-in administration avoided the thorny issue of labor and pension reform while Germany became a model example of overcoming serious pension crises through courageous reform. After reunification in 1990, Germany enjoyed a boom. But the period faded starting in 1992 and the economy slowed due to enormous unification costs. In 1993, the German economy contracted.

The recession deepened due to the fiscal deficit caused by infrastructure investments to rebuild East Germany, increased spending on social programs and unemployment during the process of transforming their planned economy into a market economy. Germany was labelled “the sick man of Europe.”

After taking office in 1998, Chancellor Gerhard Schröder of the Social Democratic Party (SDP) started labor market reform through a consultative body between employees and employers. But failure to reach an agreement due to two radical differences worsened the situation. Germany recorded negative growth once again in 2003, resulting in 4.38 million jobless people. Schröder detrmined that the existing labor market, social security and industrial policies could not end the crisis without economic support.

Its rigid labor market and social security system that protected workers also prevented employers from laying off and hiring. Furthermore, the economy weakened further amid fast aging, globalization and the rapid integration of the European Union. In order to remove the fundamental causes of the economic crisis and create a business-friendly environment, Schröder pushed forward the reforms of the labor market and social security system. During the process, the labor community and the business community passively participated.

The reform included business-friendly measures to increase flexibility in the labor market, deregulate and reform the social security system and reduce social security payouts. For instance, the government shortened the period for unemployment benefits, bolstered the efforts of the jobless to find jobs, and cut pensions to stabilize the pension fund. Schröder faced fierce resistance from opposition parties, labor unions and the SDP, but he risked his political life and pushed the major reforms forward.

German companies were able to restore their competitiveness in the global market, and the reforms contributed to reducing unemployment by increasing experts and creating jobs. They offered the opportunity for a German economic leap. But Schröder lost the election in 2005 because traditional supporters, including unions, turned against him and the SDP suffered a split.

Chancellor Angela Merkel from the conservative Christian Democratic Union (CDU) successfully completed Schröder’s reforms. In her inauguration speech in November 2005, Merkel expressed her appreciation for Schröder who pushed reform measures for the country. The case of Germany shows that it is crucial for politicians to value national interest over political interests, lead a government-initiated economic reform, and succeed the outgoing administration’s appropriate policies to maintain consistency.

At a meeting to discuss the philosophy of the Moon administration in May 2017, I presented the model examples of Germany before heads of state-run research institutions. At that event, I stressed it is crucial to select good policies of the predecessor and maintain consistency. A senior presidential official surprised me by saying, “If there is any good policy from the Park Geun-hye administration, let me know later.” I was shocked to see the stereotype and obstinacy to reject all policies of the previous administration.

The new Yoon Suk-yeol administration must immediately begin the delayed labor and pension reforms abandoned by his predecessor. At the same time, it must inherit useful policies from the Moon administration for the sake of national interest, and put aside partisan gains. Translation by the Korea JoongAng Daily staff.