4-5% across the board hike on pension premiums over 15 years

Posted on : 2013-07-10 15:35 KST Modified on : 2019-10-19 20:29 KST
Goal is to reduce burden on subsequent generations, but uniform increase could have regressive effects

By Son Jun-hyun, staff reporter

The Committee for National Pension Reform decided on the evening of July 8 to raise the pension premium rate from 9% all the way to 13-14%. With pension finances predicted to run out by 2060, the aim was to cover future shortfalls and reduce the burden on the next generation by increasing premiums for the current working-age population.

But experts are predicting a major outcry. The premium hike comes in the wake of another controversial decision by the government to lower the national pension’s income substitution rate (the payout as a percentage of the subscriber’s average income) to 40% by 2028, down from a 2007 level of 60%. Subscribers are now fuming about having to pay more to receive less in benefits.

Meanwhile, many are crying foul over the decision to increase the burden just for national pension subscribers, without any discussion of addressing military or public servant pensions, where snowballing deficits have led to tax money being used to cover shortfalls. Now uncertainty is hovering over the 14% hike plan’s chances of being passed by the National Assembly at its regular session on July 10.

 

■ “The hike is inevitable for financial stability”  

The reason the Committee decided to play the premium hike card for the first time in the 25-year history of the national pension was to increase the fund’s sustainability.

Jegal Hyun-suk, head of the research office at the Public Policy Institute for People, related the mood at the July 8 meeting.

“It was about seven-to-five in favor of raising the premiums. The ones calling for a hike were talking about raising the burden for the next generation, so it’s problematic to omit the context and play up only the premium hike aspect of it,” she said.

The committee, chaired by Korea Development Institute senior researcher Moon Hyung-pyo, consists of 15 members, including 12 from the private sector and two officials from the Ministry of Health and Welfare and the Ministry of Strategy and Finance.

In 1988, the pension scheme’s first year of operation, the premium rate was 3%. It rose at a rate of three percentage points every five years to reach 9% by 1998, a level it maintained for the next 15 years.

Meanwhile, the income substitution rate, which stood at 70% when the pension was first revamped in 1998, is scheduled to drop incrementally to a target level of 40% by 2028. The decision has some observers deriding what they call a “pocket change pension.” Another factor is the age when people are eligible to start receiving benefits: as of this year, it is set to increase by one year every five years. Where current beneficiaries start receiving payouts at 60, a beneficiary in 2033 would have wait until age 65 at least.

The calls for a hike started last year in the National Assembly Budget Office (NABO). In Sept. 2012, the office released a report on “stabilizing long-term national pension finances.” Its key conclusions were that the premium rate needed to be raised from its current 9% to 12.9% by 2025, and that the age of receiving benefits had to be increased to 67.

 

■ ‘Regaining trust is the top priority’ 

The labor community and civic groups have been up in arms over the hike. Their argument is that the public does not trust in the pension enough to accept larger premiums.

“This plan is the same thing as having no national pension at all,” said Lee Gyeong-u, policy committee chief for the national pension branch of the Korean Public and Social Services and Transportation Worker’s Union (part of the Korean Confederation of Trade Unions).

“How can they raise premiums so soon after lowering the income substitution rate to 40%? They should be spending the next 10 to 20 years building trust in the national pension instead,” Lee continued. “Instead, you have the Park Geun-hye administration pushing for too much.”

Kim Yeon-myung, a social welfare studies professor at Chung-Ang University, said the hike carries too great a risk of side effects.

“The 9% premium rate has been enough to establish a fund of 400 trillion won (US$350 billion). It’s 32% of gross domestic product, which is the already highest rate in the world,” Kim said. “If they raise the premium rate again to 13-14%, we could end up with a fund equal to more than half of GDP. Too much money piling up in the public sector causes market distortions in areas like stocks and bonds.”

Experts said there would be plenty of time to consider a premium hike after 2030. At the moment, most subscribers in their thirties to fifties are dealing with the double burden of supporting their parents’ generation while paying into the pension for their own future retirement. But once they begin their own pension, their children’s burden of supporting them will drop. This, Kim explained, was why it was fairer to raise premiums for the next generation rather than the current one.

Nam Eun-gyeong, head of the social economy team for the group Citizens’ Coalition for Economic Justice, said the fundamental issue was the low rate of income substitution.

“If you apply an across-the-board premium hike, it’s as regressive as indirect taxes,” Nam explained. Her argument is that a fairer income distribution would require less of a premium increase for low earners.

There are also concerns that people on the middle to lower rungs of the labor market are more likely to opt out of the pension altogether if premiums go up.

 

Please direct questions or comments to [english@hani.co.kr]

button that move to original korean article (클릭시 원문으로 이동하는 버튼)

Related stories

Most viewed articles