lets get bak to the main point
here's part of a thesis that a univ student wrote.
a lot of probs, anyone want to give it a try?


3. The direction of solving the National Pension problems

(1) ‘low share – high gains’ structure : the premium rate-the grant rate adjustment

The fiscal health of the pension fund is seriously threatened because of the ‘low share – high gains’ structure. The two different directions could be suggested for solving this problem. One is the paradigmatic reform, the other is parametric reform.
The paradigmatic reform means that the overall change of current partially funded system. For example, weakening the relation between the contribution – benefits, that is, focusing on the function of social insurance. Then, everyone would receive similar amount of benefits when they get old and they have less incentive to earn money and pay their premium. But this paradigmatic reform, denying the relation of contribution – benefits, should not be considered as a first-best policy. To begin with, it would be a heavy burden to government because we should make a whole new system to substitute for existing one. It is also the point to see that a lot of side effects will occur with conducting the reformed one. The first one is the decrease of incentive for working which is resulted by weakening the contribution – benefits relation. Korean society is rapidly aging. Making the jobs for old people will become a serious problem. Therefore, this direction of the reform which might lower the labor market participation ratio of seniors could be dangerous. The other side effect is that people are not willing to save their earnings since they would receive certain amount of benefits. All these things affect the financial condition of national pension.
Therefore parametric reform, which maintains the contribution – benefits relation, seems to be better than paradigmatic reform. That is, the right direction must be going along with existing system. We should make a strong financial status through ‘the adjustment of the premium rate and the grant rate’. Korean national pension system is too much beneficial to the early insured comparing to other OECDs people. This advantage was necessary to induce lots of people to join the pension. Though it can be considered as an initial cost, it seems avoidable to change the premium rate-the grant rate structure which is unfavorable to the insured. As already mentioned at 2.2.1.(?), rising in the premium rate would cause several negative effects on the whole field of economy. These effects, such as decrease in GDP, let down people’s income and a premium. Eventually, the high premium rate will threaten the healthiness of the pension funds. A 1% cut in the grant rate also leads to the similar effects to the former one. But the size of the ripple effect is much smaller than 1% rising in the premium rate. Moreover, it is even easier to find the alternative means to reduce the side effects when we select the grant rate changing. There isn’t a means that lowers the insured’s burden which is resulted by high premium rate. But lowered grant rate can be compensated with fundamental pension and retirement pension. So the negative effects to the insured and economy will be minimized.
Hence, the premium rate should stay at existing level and the grant rate should be reduced. The new bill similar to this already got through the national assembly in July, 2007. The bill says that the grant rate become 50% in 2008 and it is lowered by 0.5% per year until 40%, in 2028. Figure <df> shows the expected pension fund status which reflecting the revised bill. 2006년 이루어진 통계청의 인구추계를 바탕으로, 중위수준의 출산률을 가정한 시나리오1의 경우 The amount of funds will be decreased since 2043 and dry up in 2057. The old scenario which is based on 9%-60% structure forecasted that the funds would run dry in 2047. The date of dry-up is extended by the new bill. The national pension law has a measure that adjusts the funds in every 5 year to slow down the speed of the funds drain.


1figure. 개정안에 따른 기금적립 추이 출처 : 2007년 연금법 개정을 반영한 추계모형 재구축 및 재정시뮬레이션, 재정추계분석팀, 국민연금연구원, 2007년 12월
One aspect to consider is when we should adjust the grant rate. As more people have more vested pension benefits, it will be difficult to change the existing pension system. So it is essential to start reforming in a hurry. But it seems that making changes isn’t easy because pension problem is a supersensitive political issue. The key is building national agreement about the necessity of quick change.

(2) funds management : profitability, stability, publicness

It is obvious that the financial condition of the national pension will be weakened because Korean society is aging rapidly. Two ways are considered for solving this problem. One way is ‘paying more, receiving less’, but it seems to be impossible to conduct it. So the better way is managing the funds efficiently to enhance profitability. There are two methods; (1) setting up a new direction of the portfolio, (2) improving a quality of fund managers. Until several decades after, the size of the pension funds will keep growing. According to the ‘2007 the evaluation of national pension funds management outcome’, the size of the funds is ₩219,632,500,000,000 which increased by 15.8% than 2006. The amount of the funds is similar to the total budget of Korea. The most of the funds is invested in bonds, which isn’t profitable comparing to other assets. This is a kind of waste since it causes the high opportunity costs. Risk taking is necessary to earn more interests. We must be careful, of course, the funds has publicness. However including various assets in the portfolio is helpful for solving the high risk problem. Recently, national pension corporation announced that 40% of the assets that the funds have will be invested in the stock market. Some people are worried that the funds bear too much risk. But if we could make well-diversified portfolio, the unsystematic risk would be zero and the safety of the funds will be maintained. Finally we should pay attention to the global market including developing and developed countries. The portfolio like that can be called ultimate desirable one.
Giving a larger incentive to the fund managers is essential to raising profitability. Fund managers who manage huge funds are earning a great deal of money in the private sector. Where there’s an incentive, there’s a fancy outcome. It would be hard to give the managers same amount of wages in the private sector, of course. But showing them the gesture that trying to give better treatment will enhance their enthusiasm about the work and big profit will follow.
It is needless to say that stability and publicness are also very important. When make the investment decision, managers should take a cautious attitude. Especially they must focus to the assets which are over the certain level of the credit rating. Regarding to the publicness, managers should think about the side effects of the portfolio they’ve made. As the funds size is huge, it could distort the market condition and disturb the efficiency of the private sector.

(3) 납부 예외자 : 1-man 1-pension, income support

The existence of broad dead ground might be a serious problem since the national pension is a kind of social security system. The reason why there is a dead ground is the ‘1-income earner 1-pension’ system. Those who produce goods and service which aren’t traded in market such as house wives don’t have any taxable income. they are in the dead ground of the pension system. Some self-employed people declare their income much smaller than real. Others can’t pay their contribution since their income is too tiny to pay for it. All of those people make the size of the dead ground larger. Figure <sfdd> shows the 납부예외자 ratio in December, 2005. 납부예외자는 50.8% of the self-employed. But we should be careful before conclude that all of the 납부예외자 are avoiding contributing. A number of high-income self-employed have converted to 사업장가입자 resulted by ‘the enlargement of the range of workplace’.(사업장범위 확대 사업 That is, a large portion within the 납부예외자 is earning a small amount of income.

\ 지역 가입자(A)\ 납부예외자(B)\ 납부예외자 비율(B/A)
Under 30s\ 1,313,069\ 1,135,656\ 86.5
30~39\ 2,587,395\ 1,475,552\ 57.0
40~49\ 2,996,952\ 1,219,478\ 40.7
Over 50s\ 2,226,259\ 803,773\ 36.1
total\ 9,123,675\ 4,634,459\ 50.8
1table. 납부예외자 ratio in December, 2005, 단위 : 명, %)
출처 : 국민연금, 공공의 적인가 사회연대 임금인가, 오건호, 책세상, 2006

‘1-man 1-pension’ system might be an alternative plan. Even though you have no income and have not paid any money, you can receive your benefits from pension funds under this system. It fits more in with the original purpose of social security system. But if this system is selected, ‘the contribution – benefits relation’ should be abandoned, which means decrease in efficiency. Added to this, tons of additional budgets will be needed for maintaining the ‘1-man 1-pension system’. At first, the grant level will be lower because those who don’t pay money could also receive money. If the grant level is below the minimum cost of living, we must find another way to fill the hole of the funds. This situation will burden the pension funds with financial problem. Therefore, it would be better to find another way to solve the dead ground problem such as strengthening other social security systems or including the people who are out of the labor force into it.

(4) 형평성 : thorough income investigation

Intra-generation equality problem can be solved by thorough income investigation. Following figure shows the declaration of income of the self-employed in cities in 2000. Their average income, ₩970,000, is pretty smaller than that of the employee, ₩1,540,000. Though group Ⅲ, Ⅳ, Ⅴ include low-income braket, those who are in group Ⅰ, Ⅱ, 39% of the self-employed, earn a lot of money but their income is still low comparing to that of the employee. This survey result implies that income investigation system is quite loose. The government should try to improve its system constantly though it will not be worked out in a short time. Because knowing the income of the self-employed accurately is helpful not only for strengthening the health of the funds, but also for enlarging tax revenue.

Total (100%)\ Group Ⅰ
(14.4%)\ Group Ⅱ
(24.9%)\ Group Ⅲ
(28.6%)\ Group Ⅳ
(15.8%)\ Group Ⅴ
(16.3%)
970\ 1,413\ 994\ 852\ 931\ 789
the declaration of average income of the self-employed in cities in May, 2000. (₩1,000)
cf) group Ⅰ: business license registration, taxable income. group Ⅱ: business license registration, 과세특례자 group Ⅲ : cottage industry. group Ⅳ : the employee at the small work place(under 5 workers) group Ⅴ : part time job

The current system of pension forces younger generation to support older generation with their money. This situation causes the conflict between the generations. That is the Inter-generation equality problem. For solving it, we must replace the older system - ‘low share – high gains’ structure - with the new one which let people receive less than before. But some people insist that it’s not a big deal. First, the advantage for the early insured is the cost that must be spent at the starting point. That is, the unfair structure which seems to be beneficial for the early insured is a kind of premium. Another reason is that baby-boom generation who are advantaged from current system have triple burden. They should support their parents and children. Moreover, they will manage their own old age because their children will not help their parents’. Considering the baby-boom generation’s triple burden, the benefit from the pension system can be thought as a subsidy for their hard life.