High poverty rate of the elderly and social pressure on the introduction of universal pension system

a. Income sources of the elderly

In Korea, the elderly has been traditionally dependent on their sons and daughters for income support within the framework of

Individual Pension, Saving

Retirement Pension

National Pension

Old Age Pension

Basic Livelihood (Public Assistance) Pension

For Special Occupation

Waged Worker Self-employed Non

Basic Security

1F 2F 3F

Individual Pension,

Saving Individual

Saving

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private income security system. However, with the advent of the era of nuclear family, which was caused by industrialization, the number of the elderly who live together with their sons and daughters as well as the parents' dependency on their offspring has been dramatically reduced. As shown in the <Table 4-7>, the economic support of the offspring for their parents has been sharply decreased just in 6 years to 44.3% in 1994 from 63.7% in 1988.

Comparing with the elderly in other OECD countries, who are dependent on various income sources including public pension as shown in <Fig. 4-9>, the Korean elderly have quite limited income sources because of the short history of public pension system, and Korea has extremely high rate of the elderly in poverty among the total aged people. Against this backdrop, social pressure on the necessity of preparing countermeasures to address poverty issue among the elderly who could not be endowed the chance of receiving the benefits of public pension system is increasing.

<Table 4-7> Comparison of Income Sources of the Korean Elderly at Different Points (Compared timing:

1988 and 1994)

Source: OECD, DEELSA/ELSA(2001) 6, 2001.

Income Sources Year

1988 1994

Public Pension 1.2 3.9

Individual Pension 0.0 0.0

Savings or Other Assets 6.8 6.9 Support from Offspring 63.7 44.3

Worked Salary 26.3 37.6

Public Assistance 1.8 3.5

Others 0.2 1.5

No Response 0.0 2.3

Total 100.0 100.0

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<Fig. 4-9> International Comparison of Income Sources among the Elderly over 65 Years Old

0 10 20 30 40 50 60 70 80 90

Japan U.S.A. Germany Sweden Korea

%

Worked Salary Public Pension

Individual Pension Saving

Other Assets Support from Offspring

Public Assistance Others

b. Social pressure on the needs to introduce a universal pension system

As mentioned above, the Korean National Pension Scheme is run in the form of social insurance that offers its service only to the insured who pay the insurance fee. Thus, the opportunity to buy the policy was offered to the elderly at the point of introducing the scheme, but those who could not pay the insurance fee were not eligible to secure the right of benefit, and, accordingly, the issue on the proper ways to guarantee the income security for the elderly who have no pension has become important nowadays.

If we employ the basic pension system based on taxes, which resembles the one that most of the advanced countries already introduced, the issue of income security for the elderly and the potential no-beneficiaries of the national pension will be automatically addressed. Opposition party and various interested parties, therefore, actively support the introduction of a tax-based, basic pension system.

However, the governmental ministries in charge of operating the pension system and a certain number of experts have negative positions on the introduction of the basic pension system since it

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might give excessive burdens to the future generations when the baby boomers retire in earnest starting from the mid 2020s although there can be a number of positive effects from its introduction, especially in terms of redressing the current blind spot issue. Those who have critical positions regarding the introduction of basic pension system see that if it is based on taxes, which means implementing a pure pay-as-you-go system instead of current NPS that is run by partial pay-as-you-go-system, then it might be a way backward to the international trends with strengthening the accumulative features of public pension system.

If a country has high proportion of public pension in the post-retirement income support system for the elderly both with matured pension system and aged population, and operates the existing public pension system by dividing into a basic pension system and a pension proportional to income system, the financial burden can be mitigated comparing to the existing public pension system. However, to a country like Korea, which is at the initial stage of aging population with rapid implementation of NPS system, the introduction of tax-based, basic pension prior to the progress of aging population can be resulted in outcomes opposite to the basic direction of pension reform to ease the burden of future generations.

<Table 4-8> Estimation of Cost, If Basic Pension System Proposed by the Grand National Party Is Introduced.

(Unit: Thousand persons, trillion KRW)

Year

Beneficiary (Population with more than 65 years

old)

Total Cost

Current Cost Fixed Cost (As of 2006) 100%

Benefits 80%

Benefits 100%

Benefits 80%

Benefits

2008 5,021 10.8 8.7 10.2 8.2

2010 5,354 14.4 11.5 12.8 10.3

2020 7,821 54.9 43.9 36.3 29.0

2030 11,899 178.3 142.6 87.7 70.2

2040 14,941 364.7 291.7 133.5 106.8

2050 15,793 627.9 502.3 171.0 136.8

2060 14,583 900.3 720.3 182.5 146.0

2070 12,925 1,239.2 991.4 186.9 149.5

Source: KIHASA (2006).

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<Table 4-9> Estimation of Budget, If Introduced the Basic Pension System Proposed by Democratic Labor Party

(Unit: Thousand persons, trillion KRW) Year Beneficiary

100% Benefits Limits to Upper 20%

Current Cost Fixed Cost

(As of 2006) Current Cost Fixed Cost (As of 2006)

2008 5,021 5.2 4.9 4.1 3.9

2010 5,354 7.5 6.7 6.0 5.4

2020 7,821 36.6 24.2 29.3 19.4

2030 11,899 131.0 64.5 104.8 51.6

2040 14,941 273.2 100.0 218.6 80.0

2050 15,793 475.1 129.4 380.0 103.5

2060 14,583 690.9 140.0 552.8 112.0

2070 12,925 953.9 143.9 763.1 115.1

Note 1: Calculated based solely on the old age basic pension.

Note 2: Average income used in the above estimation was based on "Research on Basic Wage Structure (Monthly average wage was 1.75 million KRW as of 2004)"

announced annually by the Ministry of Labor. If the standard above is used, the necessary cost to maintain the basic pension is higher in the long run. Based on such presumption, the Democratic Labor Party changed the standards for the National Pension into the average income(A) of the National Pension. In this case, the necessary resources decrease in a large scale.

Note 3: The basic pension plan based on taxes proposed by the Democratic Labor Party (DLP) has a characteristics of decreasing the necessary cost comparing to the draft proposed by the Grand National Party. However, DLP added NPS with 40%

of replacement rate on top of the basic pension, suggesting a public pension system that requires significant level of costs in terms of total expenditure.

Source: KIHASA (2006).

As shown in the results of the estimations described above, the proposed basic pension scheme requires enormous financial burdens. Such alternatives are not suitable for the fundamental goal of pension reform - reducing the burden of future generation by coping with unsustainable budgets caused by low-birth rate and aging population. If the tax-based basic pension system is introduced now, the problem of the elderly in poverty can be resolved significantly, but in the long run, most of the budget will be allocated to the elderly, increasing further the burden to the

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future generation and raising the possibility of less focusing on the enhancement of national competitiveness.

Another issue frequently debated is on the low participation rate.

To be sure, the size of blind spot from the NPS is quite large in absolute terms. But it is noteworthy that the participation rate in Korea is not so low comparing to the rate in countries with similar socioeconomic circumstances to Korea. As shown in <Fig. 4-10>, countries in Latin America have far longer history of NPS than Korea but their participation rates are quite low. In other words, if the comparison is made with developing countries, not with developed countries with extremely low proportion of self-employed, the participation rate of Korea is relatively high. In this regard, there are some cautionary voices on the introduction of basic pension system, which is based on taxes with weak links between pension contribution and payment.

<Fig. 4-10> Application of Pension System in Latin American Countries

Source: Rafael Rofman, “Social Security Coverage in Latin America", World Bank, 2005.

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4.4.2 Necessity of pension reform and institutional