[Column] Keep three points in mind for pension reform

The acceleration of the fast aging in Korea points to the need for pension reform.

Kim Won-bae

The author is an editorialwriter of the JoongAng Ilbo. France is in turmoil over the pension reform pushed hard by President Emanuel Macron. His proposal to raise the retirement age eligible for a full state pension from 62 to 64 is vehemently opposed by not only the left-wing coalition but also a far-right party. The united front formed by political forces poles apart testifies to the volatility of pension reform in France.

In a live-aired television interview on Wednesday, Macron stressed the strong need for pension reform. “When I entered working life, there were 10 million retirees. Today there are 17 million. In the 2030s, there will be 20 million,” he said.

Despite the French people’s fierce resistance to the reform plan, convincing alternatives to bolster the sustainability of the pension system are hard to find, either. It would be perfect if the French government could present an attractive solution other than “working longer, paying more and receiving later.” Macron expressed regret over trade unions not presenting “any proposals to reach a compromise” during negotiations.

In December 2018, the second year of the Moon Jae-in administration, the first solution among the four proposed by the Ministry of Health and Welfare was to maintain the status quo, or keeping the premium rate at the current 9 percent and maintaining the income replacement rate at 40 percent as before. That was a solution agreeable to most members of the current generation, not the young who must pay more and get less after retirement. The Democratic Party (DP) won 180 seats in the 300-member National Assembly in the last parliamentary elections in 2020, but shunned a pension reform.

The acceleration of the fast aging in Korea points to the need for pension reform. In his first New Year’s address in January, President Yoon Suk Yeol said, “If we cannot resolve a snowballing deficit on the pension front, we canot ensure the sustainability for our pension system.” Opposition DP leader Lee Jae-myung echoed the presidential message in his speech to congratulate the start of a debate on the pension reform hosted by the Institute for Democracy, a DP think tank. “As our ultralow birthrate translates into a bigger financial burden for the young generation to care for more senior citizens, the need for pension reform grows even bigger,” he said.

Lawmakers hurriedly set up a special committee on pension form in the National Assembly and launched an advisory committee of pension experts, including professors, from outside. As expected, the conservatives prioritized fiscal health of the National Pension Service while the liberals championed a post-retirement income assurance. Their promise to hammer out a solution is yet to be realized.

The welfare ministry has been keeping mum except for a pledge to submit a comprehensive plan in October. Can the lawmakers really present a satisfactory solution amid the tense confrontation between the DP and the governing People Power Party (PPP) particularly with less than 13 months left before the legislative elections in April next year? President Yoon emphasized the significance of pension reform for a better future of the county, but his approval rating is declining after rushing to address the wartime forced labor issue with Japan and pushing for a more flexible application of the rigid 52-hour workweek to worksites.

Nevertheless, the pension reform cannot be delayed. The conservative Yoon administration must do at least three things as follows.

First, the government and the PPP must first come up with a unified solution, and the DP must present a responsible alternative to the solution. If the Yoon administration follows in the footsteps of the past administration and offer four solutions, including the first one based on maintaining the status quo, that means the conservative government would not reform the national pension system.

Second, the government must delay the year of the expected pension fund depletion by more than 10 years. Currently, the National Pension Act mandates the government to calculate fiscal balance every five years, but building social consensus is very difficult.

Third, the government must raise the premium rate. What matters most in pension reform is the premium rate and the income replacement rate. The civilian advisory committee reportedly discussed a lifting of the premium rate by 15 percent and adjusting the income replacement rate accordingly. Our current premium rate fixed at 9 percent of subscribers’ income cannot ensure the sustainability of the pension system. For your reference, the premium rate for Japan’s National Pension is 18.3 percent of subscribers’ income.

When the welfare ministry briefed former president Moon about its plan to raise the premium rate in 2018, he ordered a rework on the issue given its “incompatibility with people’s eye levels.”

Korea’s major umbrella unions demand the legal retirement age be extended from 60. The government must find effective ways to harmonize the retirement age extension with pension reform. But it is not easy for the government to lift the retirement age when young people have trouble finding a job. When the older generation gives way, the younger generation could be persuaded.

The corporate sector is no exception. Employers have been paying a half of the pension premium for their employees. If retirement age is extended and the premium rate rises, companies must pay more, which will give more pressure for small and midsize firms. The government must give the corporate sector enough time and incentives to prepare for the new pension system.

Translation by the Korea JoongAng Daily staff.