ED Pension reform progress

Amid a leadership void, the bickering political parties and the government have reached a significant consensus on parametric pension reform. With pension funds at risk of depletion by 2055, reform has been a constant priority for several administrations. It is a sensitive yet far-reaching issue as 20 percent of Korea's population is over 65 years old and the total fertility rate stood at 0.75 last year. Recently, we saw major progress on the issue as an agreement was reached on the 43 percent income replacement rate, atop the previous agreement to raise the contribution rate to 13 percent from the current 9 percent. More specifically, the main opposition Democratic Party of Korea (DPK) compromised on its stance that the pension should replace up to 44 percent of a retiree's income, relenting to a proposal of the ruling People Power Party (PPP). If this preliminary agreement comes to full fruition, this will be the first successful pension reform in 18 years, in which the contribution rate will climb to 13 percent and the income replacement will be 43 percent.

However, it is not over until it is over. The two main parties should rise to the challenges of reforming a sensitive issue, and settle a few last-minute issues, such as the DPK's opposition to the adoption of an automatic adjustment mechanism. The main opposition party set this condition as part of its full agreement to the income replacement rate of 43 percent. On the other hand, both the PPP and the government advocate adopting the automatic adjustment mechanism, a system that stabilizes pension finances by automatically factoring in demographic and economic changes such as inflation, decline in the number of subscribers and the rise in life expectancy of the subscribers. The PPP and government highlight the stability and sustainability of the pension fund as a means to ensure a source of livelihood for retirees, while on the other side, the DPK and civic groups mainly argue that adopting the mechanism reduces pension payouts. The hardline Korean Confederation of Trade Unions has issued a statement on the agreement so far saying that "the goal of pension reform should be to ensure existential rights in senior years in Korea, where the poverty rate of older adults is the highest among the OECD."

If we consider that under the current scheme, the national pension fund is expected to be in a deficit by 2027 and depleted by 2055, we cannot question whether it's timely or worth fighting over the automatic adjustment mechanism. Experts say that eventually, the automatic adjustment mechanism will have to be adopted. This may well be the reason that officials at the Ministry of Economy and Finance and the Ministry of Health and Welfare are gently urging the pending reform committee to reconsider and include the adoption of the automatic adjustment mechanism.

The parties are also at odds over how to form the special committee to oversee the pension reform process. There are two planned plenary sessions ahead for Thursday and March 27. It is important to get the revision approved through these sessions. Negotiating reforms for a broad social scheme such as the pension fund is a tough task, as the citizens' postretirement years hang in the balance. But during these fast-changing, politically volatile times, the parties and the government have taken the wise step of agreeing on a few basic rules. They should proceed from here on to properly revamp the system, creating a stronger safety net for the public in their postretirement years. More complex reforms including vocational pension funds should be tackled carefully and gradually over time. Those involved in the reform process should make sure that they make the best use of the opportunity provided by the moment, rather than merely exploiting the leadership void.