Where does the pension difference come from?

We would be committing a serious sin against future generations if we lift the payout rate without
reliable financing backup.

Joo Jung-wanThe author is an editorial writer of the JoongAng Ilbo. South Korea’s national pension program can last 30 years at most, while Japan’s is sustainable for at least 90 years. The Japanese do not have to worry about their public pension system running out of money at least until 2115. The young generation there can expect a comfortable retirement compared to their Korean counterparts, who will inherit a deficit in social security from birth. Japan also struggles with multiple challenges, but it is well above Korea in terms of its national pension security.

Korea’s national pension scheme is headed for doom at the current pace. According to a recent projection by the government, the fund will fall into the red from 2041 and entirely run out of reserves by 2055. If the birthrate falls further and economic growth does not keep up with expectations, the pension may not last until 2055. From then on, there are no other ways to sustain the system than issuing astronomical debts or collecting more taxes.

Japan also releases its pension projections every five years. According to the latest data unveiled in 2019, the pension is safe until 2115. Japan manages the public pension under a 100-year cycle and assures the people that their old-age pension is safe for the next century. Tokyo will be announcing updated estimates in August.

Japan’s national pension is more stable than Korea’s due to a simple difference. It collects more and pays out less than Korea, thanks to a comprehensive public pension reform implemented in 2004 through social consensus.

Japan’s public pension system is two-tiered like Korea’s, but the devil is in the details in Tokyo’s policy. The first tier is a universal system, dubbed the Basic Pension, which is similar to Korea’s Basic Pension for the elderly. While Korea’s is entirely covered by the state, Japan’s is co-shared with individual contributors. The second earnings-related tier works like Korea’s contribution-based National Pension, with the enrollment of salary-earners of public and private employers. Unlike Korea’s, it exempts the self-employed.

Japan also struggled with its money-losing contribution-based pension two decades ago due to accelerated aging, low fertility, and stagnant economic growth. It called for a massive overhaul to avoid a deficit. Chikara Sakaguchi, who was made the Minister of Health, Labor and Welfare after two related ministries were merged under a coalition government, took up the challenging task of setting the table for discussions on a “100-year Safe Pension Plan.” The cornerstone of the reform was a gradual increase in the premium from 13.58 percent to 18.3 percent and the introduction of an automatic benefit control mechanism, the “macroeconomic slide,” in which benefits are adjusted relative to consumer prices, fertility rate and life expectancy.

The reform process was not easy. Views differed between the ministries of health and finance as well as within the ruling party. Prime Minister Junichiro Koizumi in February 2004 finalized a reform outline in a cabinet meeting. After the revision passed the legislature, people no longer had to fret about the pension going broke at least for 100 years. Japanese contributors pay a premium of 18.3 percent, nearly doubling Korea’s 9 percent.

The benefit is also much smaller than Korea’s. The income replacement ratio was 61.7 percent, according to the 2019 report. The ratio is guaranteed to stay above 50 percent. The payout looks more generous than Korea’s 40 percent at a glance. But its income replacement ratio combines the first-tier pension (based on the benefits for an elderly couple) and the second-tier pension (based on a single income earner in the family). It means the payout combines the basic pension for an elderly couple and the earning-based pension in Korea. When counting only the earnings-based pension, the replacement ratio falls to 25 percent.

Korea’s income replacement ratio can go up if its pension has sufficient reserves 100 years later. But the prospects are not bright. An expert group worried about an excessive burden on the next generation if the income replacement rate goes up. Deficits to stockpile for decades will backfire. We would be committing a serious sin against future generations if we lift the payout rate without reliable financial backup.