Moves by Taiwan’s governing as well as opposition parties to reform the nation’s pension system are “credit positive” to the nation’s sovereign credit rating, Moody’s analysts said.
However, it is very possible that any final pension reform bill will be “watered down significantly,” as the current proposals meet with strong dissent from all fronts, the ratings agency said in a recent report.
On Jan. 30, both the Chinese Nationalist Party (KMT) government and the main opposition Democratic Progressive Party (DPP) presented their respective reform proposals in the face of a growing public outcry over the health of the national pension system.
The proposals — which aim to keep the ailing pension system afloat by lowering the payout for private-sector employees and civil servants, while readjusting contributions from private-sector workers, civil servants and the government — are expected to be sent to the legislature for review as soon as April.
“Progress with pension reform would be credit positive for Taiwan and help to ease fiscal pressures,” Steffen Dyck and David Erickson, analysts at Moody’s Investors Service Singapore Pte Ltd, said in a report on Feb. 4.
Moody’s currently offers Taiwan with “Aa3” foreign and local currency sovereign ratings, the fourth-highest investment grade, with a stable country outlook.
The agency said Taiwan’s population has been rapidly aging in recent years, which raises pension costs and adds to the strains on public finances.
“Taiwan’s underfunded pension system comes on top of a fiscal position that has shown strains. The general government fiscal deficit has averaged 2 percent of GDP over the past 10 years, and general government debt has increased to 44 percent in 2012 from 27 percent of GDP in 2000,” Dyck and Erickson said.
According to statistics provided by the Ministry of the Interior, as of the end of last year, nearly 11.2 percent of the nation’s citizens were aged 65 and above, or around 2.6 million people.
The Council for Economic Planning and Development has predicted the ratio will rise to 14 percent — the UN benchmark of an aged society — by 2018 and climb further to 20 percent by 2025.
Facing the pressures exerted by the rapidly aging population, declining birth rate and difficult public finances, both the KMT and DPP have identified maintaining financial stability of the pension system as a matter of urgency, even though there are still obvious differences in their plans concerning pension payouts, contributions from employees, income replacement rates and pension premiums.
Nonetheless, Moody’s said the differences between the KMT and DPP proposals pointed to a consensus on national interests by the two political parties that may prove constructive in the long run.
“The fact that both the KMT and the DPP are drafting reform proposals is positive and highlights political consensus that something needs to be done to fix the flawed system,” Dyck and Erickson said.