Reforming our shockingly fragile pension system and why pension reforms are vital for long-term financial sustainability
Amidst demographic transitions and changing intergenerational mobility around the world, pension systems are vital to financial sustainability. Yet, public debates on pension reform remain underappreciated or overlooked; they are often perceived as too technical or complicated.
In an interview with two fellow KFAS-Salzburg Global Leadership Initiative participants, Taeil Kim, professor of public administration at Korea University, outlines why pension systems matter and why we should be concerned in a time of demographic shifts. A leading expert in national pension reform, his latest book, "Uncomfortable Pension Policies: Reforming our shockingly fragile pension system," introduces readers to the growing challenges faced by all pension holders today.
How is pension reform tied to financial sustainability?
TK: There are two significant challenges to financial sustainability: aging and the climate crisis. The primary driver of concerns about financial sustainability in many countries is the aging population. This demographic shift leads to increased government expenditures in areas such as pensions, medical care, and elderly services. Of these, pension spending is the largest component. For instance, pension expenditures in Greece, Italy, and France exceed 15% of GDP. While the current burden is substantial, it is poised to escalate further as the population continues to age.
Why should the general public care about pension reform?
TK: In most countries, the present working generation shoulders the responsibility of funding pension expenses for the elderly generation. When present workers retire, it will be their turn to benefit from pensions and the future working generation to invest. When the number of younger workers is larger than the number of older retirees, then this system is relatively sustainable. But what happens when the number of younger workers is much lower than the number of older retirees?
This is the problem faced by aging societies, where pension systems may distribute more funds than they receive. Pension reforms are thus vital to rebalancing the burdens foreseeable across present and future generations. This may entail short-term costs for long-term sustainability.
Pension reform can thus be an unpopular choice for today's voters, presenting a dilemma for politicians sensitive to public opinion. This is also why it is imperative that the general public is aware of pension systems and the challenges faced in the immediate future.
Could you share some key takeaways from your new book?
TK: My book addresses pension reform in South Korea, where the structure of the public pension system currently results in recipients receiving significantly more than they contribute. Here, the unprecedented rate of aging in South Korea poses a looming challenge for future generations.
If the current demographic trajectory persists, then our pension system will run out of money. Although the current pension premium stands at nine percent, maintaining this rate would require an increase to over 30% after 30 years to sustain benefits for the elderly, which is deemed unfeasible. The anticipated old-age rate at that time is expected to surpass 40%, and the surge in medical and care expenses further compounds the strain on government finances.
My solution is to establish a balance where each generation receives benefits commensurate with their contributions. This will ensure fairness in the distribution of the burden across generations. Achieving this equilibrium solely through pension premiums is challenging, given that benefits often exceed the premiums paid.
To address this, it is imperative to augment insurance premiums and establish a fund financed by current taxpayers. This fund would be earmarked for future pension expenditures, providing a more sustainable solution. Additionally, it is crucial to enhance the role of private pensions [paid by an employer or returns from an individual's private investment scheme] in guaranteeing retirement income alongside public pensions [paid by the state]. This multifaceted approach aims to create a more equitable and viable pension system for South Korea's evolving demographic landscape.
Is this approach to pension reform and financial sustainability applicable only in South Korea?
TK: The escalating financial burden on future generations from an aging society is a challenge faced by most countries—albeit with variations in intensity. Consequently, pension reform aimed at enhancing financial sustainability is a universal concern. At the heart of this reform is the imperative to establish parity between what each generation pays and receives, thereby promoting fairness in intergenerational burden-sharing.
I have proposed the establishment of a fund funded by the present generation, mirroring practices already adopted by certain countries. Notably, Australia has instituted a "future fund," and New Zealand has followed suit. These funds are strategically designed to accumulate resources for future financial expenditures, ensuring long-term financial resilience.
What is a key message that you would like to share with policymakers on pension reform?
TK: The objective is to ensure equitable distribution of the burden across generations. Presently, Korea's old-age rate is below 20%, resulting in relatively modest financial outlays for the elderly, encompassing pensions, medical care, and care services. However, projections indicate that the old-age rate is poised to surpass 40% within the next 30 years. Anticipated financial obligations for the elderly during that period will significantly exceed current levels, presenting a formidable challenge for the working generation at that time to shoulder the entire burden.
To address this, the proposed strategy involves proactively establishing a fund, primarily allocated at the expense of the current generation, with the intention of utilizing it in the future. This proactive approach, especially in funding pensions, aims to alleviate the impending strain on the working generation by securing financial resources in advance.
What are some further areas of research needed to improve pension reforms?
TK: The primary purpose of a pension is to secure income during retirement, which requires sustainable pension finances. Korea's current focus on pension reform centers on enhancing the sustainability of pension finances, aligning with the overarching goal of ensuring adequate income in old age.
In essence, the objectives of pension reforms are two-fold: to optimize financial sustainability and to fortify pensions' ability to effectively provide retirement income.
To achieve the second objective in the Korean context, two key initiatives are imperative. First, there is a need to decrease the number of non-beneficiaries and [second] extend the subscription period. Presently, a considerable portion of the elderly lacks eligibility for the national pension, and those who are eligible often receive meager pension amounts due to short subscription periods. Although future prospects may improve, the anticipated outcomes are still deemed insufficient. Therefore, a strategic policy approach is essential to broaden the pool of pension beneficiaries and extend the subscription period.
Relying solely on a public pension proves challenging to furnish adequate retirement income. Private pensions should contribute significantly to securing retirement income. While Korea has a private pension designated as a mandatory retirement pension, its current efficacy in guaranteeing retirement income is minimal. There is a critical need to optimize the functionality of [private] retirement pensions to ensure robust support for individuals during their retirement years.
Professor Taeil Kim is an expert in national pension systems and serves as a professor of public administration and chairman of the Institute of Aging at Korea University in South Korea. Professor Kim has published numerous books and research papers on government budgeting, welfare policy, the Korean economy, and more.
His book "Uncomfortable Pension Policies: Reforming our shockingly fragile pension system" is available in Korean.
This article was featured in our digital publication, which includes more coverage from the KFAS-Salzburg Global Leadership Initiative program on "Uncertain Futures and Connections Reimagined: Connecting Generations."
The KFAS-Salzburg Global Leadership Initiative is a multi-year program that annually brings together an international, intergenerational, and interdisciplinary network of Korean and global thought leaders to create new connections and tackle global challenges.
