Hearing from Think Tanks: Is the National Pension Service Being Managed Properly?

In Kanji Kawai’s novel *Devil in Heaven*, elderly people on the verge of receiving the National Pension die one after another in mysterious accidents. In another novel, *Your Old Age* by Hyeongseo Park, elderly people who burden the finances of the National Health Insurance Service and the National Pension Service are also murdered in succession. Who killed these elderly people?

The murderer is the state itself. Both novels are set in a future Japan and South Korea that have entered a super-aged society. Their shared plot is that, in a future society where the elderly population outnumbers the working-age population and enormous welfare and social insurance costs have become a social problem, young people forced to support the older generation grow furious over pension depletion, and a government facing fiscal pressure secretly kills the elderly.

They are gripping stories born of the writers’ imagination, but in South Korea, which stands on the brink of becoming a super-aged society, their implications are too serious to dismiss as mere fiction.

Systems That Place Excessive Burdens on Future Generations

As South Korea enters a low-birthrate, aging society, the population able to work is falling sharply while the elderly population that must be supported is rising rapidly. If this trend continues, South Korea is expected to enter a super-aged society in 2026, when those aged 65 and older will account for more than 20% of the total population. Today, five adults support one elderly person, but in 50 years, one adult will have to support one elderly person. In other words, society will be sustainable only if future generations pay enormous taxes and insurance premiums.

If our society is to remain healthy without descending into intergenerational conflict, we need to reform, within reasonable limits, systems that burden future generations. The most urgent task is reform of the National Pension. When it was introduced in 1988, the National Pension was designed in its current “pay less, receive more” structure without taking into account low birthrates and population aging. For now, the fund is still accumulating because the number of people receiving pensions is smaller than the number paying into the system. But around 2060, the fund is expected to be depleted as the working-age population shrinks.

If the current National Pension system remains unchanged, future generations will have to pay more than one-third of their income in pension premiums, yet receive less than current pension beneficiaries. Because there will be no accumulated fund left, the pensions that must be paid in a given year will have to be collected from workers in that same year. It is doubtful that future generations will accept continuing to pay into the National Pension and support the elderly under a system where they “pay more and receive less.” Unless institutional reforms are made at a level they can accept, there is no guarantee that the novels’ stories will not become reality.

National Pension reform is not an easy issue. Because of the political burden, no one wants to talk about changing the current “pay less, receive more” system. On the contrary, politicians promise to hand out even more. President Moon Jae-in also pledged to raise the National Pension replacement rate without raising taxes or insurance premiums. Perhaps because of that promise to the public, he recently opposed a reform proposal from the Ministry of Health and Welfare that would have required people to “pay more,” saying it did not meet public expectations. At present, people pay 9% of their income in premiums, and the plan was to raise that to 12–15%.

The Ministry of Health and Welfare has additionally presented four options. Option 1 would maintain the current system as it is. Option 2 centers on raising the basic pension payment to 400,000 won. Options 3 and 4 would modestly increase premiums while also modestly raising benefits.

Whichever of the four options is chosen, the National Pension burden future generations will have to bear will exceed 30% of income. Unfortunately, the National Pension is not a magic wand that can produce gold on command. Without institutional reform, there is no way to prevent fund depletion. Even if it is difficult, the political class must persuade the public and find a way to prevent excessive burdens from being placed on future generations.

Need to Secure Political Independence and Raise Returns

The return on the National Pension fund must also be improved. The higher the return, the more the depletion of the fund can be delayed and the more the burden of premiums on the public can be reduced. It is said that raising the rate of return by 1 percentage point can delay fund depletion by more than five years. In 2018, the fund management return was -0.92%, recording losses of more than 5.8 trillion won. Its five-year return from 2014 to 2018 was also only 4.18%. That was lower than the 10.98% of the Canada Pension Plan, 6.78% of Sweden’s public pension, and 6.4% of the Netherlands’ public pension over the same period. In the long term, there is a need to shift to a system in which fund management is entrusted to the private sector and returns are improved through competition.

To increase fund management returns, political independence must first be guaranteed. Currently, the Fund Management Committee, the top decision-making body within the National Pension, is under the Ministry of Health and Welfare, and its chair is the minister of health and welfare. The chair of the National Pension Service is also appointed by the minister of health and welfare.

With a structure in which government influence is bound to be strong, efficient fund management is difficult. Without guaranteed independence, the National Pension is highly likely to be used as the government’s slush fund. The president’s idea of using the National Pension to punish illegal and improper acts by controlling shareholders of large conglomerates, and the minister of gender equality and family’s remark that National Pension investment should be increased in companies with a high ratio of female executives, show that the government is steering how the National Pension is managed.

In particular, since July 2018, the National Pension has been able to exercise shareholder rights over private companies under the name of the stewardship code. The stated purpose of its introduction was to intervene in the management of portfolio companies in order to maximize National Pension returns, but in reality it is highly likely to produce the exact opposite result.

If the government exercises influence over corporate management according to its own preferences, corporate profitability may actually decline. In fact, foreign pension funds that use stewardship codes are all operated in a politically independent manner. They do not propose using pension funds for government projects such as public rental housing or public daycare centers. They focus only on increasing fund returns and delivering benefits to participants.

Public trust in the National Pension is low. Not many of those currently paying into it believe they will properly receive it back in old age. It is necessary to accelerate reforms to prevent fund depletion and work to raise returns and thereby increase public trust.

There also needs to be an option that ensures the pension contributions I have paid are properly saved and returned in old age, and that allows people to switch to products managed by other institutions if returns are low. Only then will people themselves have a sufficient incentive to enroll in the National Pension for a secure old age.

Eun-kyung Kwak

Head of Corporate Culture Division

Center for Free Enterprise (CFE)

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Original title: 싱크탱크로부터 듣는다....국민연금, 제대로 운영되고 있나

Author: Eun-kyung Kwak

Date: 2019-04-11

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20086