[THE INVESTOR] Korea’s state pension fund is the world’s third-largest which oversees 634 trillion won (US$561 billion) in assets, but is not the best-run.
With a return of just 0.49 percent from this January to May, it appears highly unlikely to achieve the 7.26 percent previously forecast for this year.
The National Pension Service’s lackluster performance is worrisome to many here because if the return is lower by 1 percentage point than the estimates, the funds will run out five years earlier, according to a long-term projections in 2013 by its financial estimate committee.
From 2013 to 2017, the average return was 5.2 percent a year, 1.33 percentage points lower than originally projected, according to data provided by the Ministry of Health and Welfare.
To make matters worse, the NPS has already garnered heavy criticism by acting as a piggy bank of sorts for the government. For instance, as the largest shareholder of Samsung C&T with an 11 percent stake, the fund voted for the controversial merger between Samsung C&T and Cheil Industries to be approved back in 2015. The NPS’ backing played a key role in approving the merger but it came with at least 138.8 billion won in losses for the pension fund.
Faced with the bad press, the NPS has been unable to find a chief investment officer for a year now.
Last week, the fund was catapulted to the spotlight again after some controversial recommendations were given by an independent panel responsible for offering long-term projections on the operation of the fund every five years.
Due to the lousy returns coupled with aging population and sluggish economic growth, the benefits that people will receive are becoming smaller, making it impossible to depend on it for post-retirement living, which had been the initial vision when the fund was launched in 1988.
Inevitable changes
The panel mostly outlined calls for longer subscription periods and reduced or delayed benefits. They suggested further delaying the age eligibility for the benefits to 68 years.
The side effects may not be as big, the members said, because Koreans now tend to enter the workforce at a later age and remain longer than before, effectively working beyond the retirement age. Those who don’t have an income can be exempted from contribution.
Despite the grounds, some hundreds of petitions were posted on the presidential office Cheong Wa Dae’s website after the suggestions were made public, many complaining about the system and even suggesting scrapping it altogether.
In the face of mounting criticism, the health and welfare minister said on Aug. 13 that the recommendations were not the government’s final plans but only “draft proposals.”
President Moon Jae-in also stepped in, saying that the changes will be made in line with his election pledge for expanding everyone’s post-retirement income. “I also want to stress that the government will not implement changes that lacks public endorsement.”
It may not be finalized plans, but it does suggest that the there is something gravely wrong with the fund, on which some 21.41 million people depend.
So what went wrong?
There are now projections that the NPS is likely to run out by 2057 instead of the previously forecast 2060.
Currently, people aged between 18 and 60 are subject to mandatory subscriptions, but as the fund is running out and people living longer, it has been decided to raise the ceiling for receiving benefits from 60 to 65 years, despite that the official retirement age in Korea is 60.
The payout year was also pushed back in phases in a revision enacted in 2013 for a one-year delay every five years.
This means that people who were born in 1952 or before would receive their pension at the age of 60, but those born in 1969 or after would get their pension from the age of 65.
Instead of raising the monthly commitment, the government has opted to hand out less, and from a higher age.
Another issue is the falling income replacement ratio -- the proportion of pension benefits out of the average income that each person accrued over their subscription period -- started out at 70 percent in 1988 but now stands at 45 percent on paper.
In reality, the percentage is about 24 percent, according to NPS data. This is because many actually cannot fulfill the 40-year subscription period.
The International Monetary Fund warned in 2016 that if remedial actions fail to be placed in time, there could be a pension-led fiscal cliff driven by the aging population. The IMF recommended Korea to consider adopting automatic adjust mechanisms in its pension system such as adjusting the retirement age for each generation as part of the measures to slow down the accumulation of imbalances.
Some experts, however, argue that the situation is not too bad. “The 45 percent income replacement ratio compares with the average 18 percent for the Organization of Economic Development and Cooperation which has a 40.6 percent average ratio,” said Yun Suk-myung, a researcher at Korea Institute for Health and Social Affairs who is on the recommendation committee.
“There is no need to panic. The problems are merely a message urging us to come up with solutions early on,” Yun said. “We are only trying to improve the national pension scheme to make it more sustainable.”
Why the fury?
If everything is all inevitable, and if this is nothing more than a situation of taking preventive measures, why is the public so unwilling to comply or so resentful of these changes, people ask.
A big part of the reason is because citizens compare their pensions with those for public officials including teachers and members of the military.
“I want to understand, but it feels quite unfair when we see it in the news all time of how government officials and military officers commit so much fraud or make mistakes that can cost our future,” said Kim Sun-young, a 40-year-old office worker who has subscribed to the NPS for 10 years.
In 2016, national pension fund subscribers received 368,210 won on average every month but beneficiaries of the Government Employees Pension Service, a pension fund with 60 years of history, were give 2.4 million won.
By Park Ga-young (gypark@heraldcorp.com)