[Editorial] A bitter pill

Pension reform plan focuses on fund stability; ball now in Assembly's court

The government's national pension reform plan unveiled Wednesday is focused more on the financial stability of the pension fund than on retirees' welfare.

The point of the plan is increasing pension contribution and income replacement rates simultaneously.

Employees contribute part of their wages to the national pension fund, with their employers bearing the cost of half of their contributions. Upon retirement, retired workers then receive a certain percentage of their preretirement income called the "income replacement rate" as their pension.

Under the plan, employees' contribution rate will be raised from the current 9 percent to 13 percent. The income replacement rate -- originally set at 70 percent when the pension system was introduced in 1988 -- is scheduled to decrease from the current 42 percent to 40 percent by 2028. The plan fixed the current 42 percent as a new target rate.

But the planned income replacement rate is 2 percentage points lower than the 44 percent compromise agreed to by the ruling and opposition parties during the last session of the National Assembly. It seems the government is trying to lessen the financial burden for pension payouts at the expense of incomes for retirees.

One of the eye-catching parts of the plan is differentiating the pace of raising the contribution rate to 13 percent by age group. The contribution rate for those in their 50s and 40s will be raised every year by 1 percentage point and 0.5 percentage point, respectively. The contribution rate for those in their 30s and 20s will also be increased by 0.3 percentage point and 0.25 percentage point each year, respectively.

The premise is to mitigate the burden on younger generations while maintaining fairness among generations. Proposing to raise the contribution rate for younger generations slowly compared to those who are older is said to be an unprecedented move worldwide. If the plan is approved, it will be a bitter pill to swallow, as there will be grievances from older contributors who will see their contributions jump as they have to rise to the target level in a relatively short period.

The government said it will consider extending the age until which it will be mandatory to contribute to the national pension fund from the current 59 to 64. This issue is associated with raising the statutory retirement age. If the official retirement age is not raised, those who retire at 60 under current law will likely oppose a mandate to contribute until the age of 64. Without supplementary measures, this step could widen the income divide among retirees.

The government has revived the spark of pension reform by presenting concrete plans after failing to set a clear course. It is the first time in 21 years -- since 2003 -- that the government has prepared a single proposal. What's important is the plan aims to increase the contribution rate, which is an unpopular measure that has remained untouched for as many as 26 years after 1998. Compared with the hollow plan it submitted to the National Assembly last year without definitive target numbers on the contribution rate and income replacement rate, the government has made some significant progress.

Now, the ball is in the National Assembly's court.

Those who are in their 40s and 50s are expected to resist the proposal to implement differential contribution rates. An "automatic adjustment (stabilization) system" that the government said it is considering introducing is also likely to face opposition because, under such a system, pension benefits would be cut automatically if the pension fund's financial status deteriorates significantly. Extending the age until which it is mandatory for subscribers to contribute, and the statutory retirement age, are time-consuming issues.

Reforming the national pension system is a tough job of finding a middle ground amid many conflicting interests. As a matter of fact, it is practically impossible to satisfy all interested parties, because any plan focusing on fund's financial stability cannot escape the belief that people must "contribute more and receive less." Caution and the detailed coordination of differing opinions are required to avoid a flareup of intergenerational conflict.

National pension reform cannot be delayed any longer. The exhaustion of the national pension fund looms large in the future. The opposition parties should shed opposition for it's own sake and be cooperative on pension reform.

No nationwide elections are scheduled until June 2026 when local elections for governors and mayors will be held. Considering the timing, the remainder of this year is an ideal time for the rival parties to strike a deal on a broad structure.

By Korea Herald(khnews@heraldcorp.com)