Pension Coverage : Korean Case

Transcription

1 Pension Coverage : Korean Case 29 March 2006 Kim, Hee Sik Senior Economist, The Bank of Korea The opinions in this presentation are of the author s own and do not represent those of the Bank of Korea

2 Coverage in Korea s Pension System National Pension Scheme (A mixture of basic pension and earnings-related pension, Size of Assets: 20% of GDP (2005)) Coverage: 77%of Employees(2003) Government Employees Pension Scheme (GEPS) Coverage: 4.3% of Employees(2003) Private School Teachers Pension Scheme (PSTPS) Coverage:1.0% of Employees(2003) Military Personnel Pension Scheme (MPPS) Size of Assets: 0.1% of GDP Retirement Allowance Scheme (Largely unfunded) Coverage: mandatory for firms with more than 5 workers Corporate Pension Scheme (Funded) Coverage: c0.2% of Employees (data from Dec05 to 23Feb2006) Personal Pension Schemes Size of Assets: c3% of GDP Coverage: c15% of Employees 2

3 Coverage Expansion of National Pension Scheme National Pension (Left) Coverage Rate (Right) Self-Emp Rural Selp-Emp Urban 0 3

4 Some Consequences De facto non-covered More than 50% in the self-employed worker sector exempt from contribution: thus not covered for the periods exempt Low rate of premium collection in the self-employed sector(75.7% v.s. 99.1%) : Non-contributors are not covered Burden shifted Self-employed workers tend to underreport their Income : thus, burden shifted on employed workers sector Worsened unbalance between contribution and benefits Projected to exhaust National Pension Fund by

5 Un-sustainability of NPS Projections for NPS Fund, 2002~2050 Billion Won Year Fund Cumulated Revenue Expenditure Balance Saved (%) ,396 29,687 4,219 25, ,694 50,080 11,094 38, ,775 74,678 19,091 55, , ,073 35,010 74, ,256, ,186 64,936 70, ,581, , ,103 59, ,715, , ,177 4, ,702, , ,456-12, ,447, , ,188-97, , , , , , , , , , , ,356-5

6 Efforts to Fix within the Current Public-based Paradigm Re-classification of self-employed to employed workers Despite of 1999 reform, employees at firms with less than 5 workers continued to be categorized as self-employed workers Three-stage policy to reclassify self-employed to employed workers But the response is slow: Self-employed workers decreased 9% from 2002 to 2005 Parametric reform bill A gradual increase in the retirement age form 60 to 65 A gradual reduction in income substitution rate from 60% to 50% for those who contributed for 40 years A scheduled increase in the contribution rate from 9% to 15.90% by 2030 Structural reform bill : Change NPS into a Two-Tier system: Basic Pension covers all citizen aged between 18 and 60 (replacement rate 20%), Financed by general taxation (i.e., VAT rate increase from 10% to 19.22%) Earnings-Related Pension: Only income-earners will be covered by the actuarially balanced ERP (contribution rate 7% and replacement rate 20%of average wage) 6

7 Another Alternative : Increase Reliance on Private Pension System Additional benefit of private pension: development of capital markets Another alternative Make public pension system complementary to private pension system, for example, by separating NPS into basic pension program and privatized pension funds This will increase the size of competitively-run pension funds sector rapidly 7

8 Rationale Size of Private Pension Funds Matters, esp in an Open Capital Market Capital market may fail to develop due to pecuniary external effects which result from presence of indivisible investments and love of diversity in portfolio (Acemoglu and Zilibotti 1997) Agents have incentives to shun away from risk taking while prodding others to take risks first in voluntary coalitions (Investment Funds) Accumulation of competitively managed pension funds may lead to capital market development by increasing long-term savings and risk taking of an economy as a wholex Critical mass matters (Vittas 1999) : Empirical evidences are found in Anglo-Saxon countries sample, implying that initial size of pension funds matters in achieving positive spillover effects of pension funds on development of capital markets (Hee-Sik Kim 2006) Conflict between Public and Private Pension Programs Incentives of agents not to take risks by themselves 8

9 Implication A paradigm shift and structural reforms may be needed to increase both reliance on private pension system and coverage Education policy can be effective in increasing coverage when implemented with a market-oriented reforms in pension system and financial system People learn best about the opportunities and risks while they are learning by doing Examples of success or optimism are best for agents to take risks involved in private pension system Education itself may help make environments favorable for such a transition These will help the economy shifting out of a low-investment equilibrium to high-income (supported by innovation) equilibrium 9