The employment panel of the Economic Development Advisory Conference has recently completed a report, the conclusion of which was to undertake two parallel pension plans, one for an "individual retirement account (IRA) system" and another for an "additional annuity system" -- the former being a corporate pension and the latter being a social insurance plan. The "additional annuity" system is the revised wording for what was originally called an "annuity system." The two suggest significant differences in regard to the government's responsibilities.
In a pure social-insurance system, whenever a retirement fund fails to pay adequate pensions for retired workers after an enterprise goes out of business -- or because of other reasons -- the government has to take financial responsibility. The government's financial burden would therefore increase.
In its conclusions, the employment panel suggested that if the premium turns out to be higher than 6 percent in the additional annuity system, then workers should be required to pay for the additional portion. Whether this suggestion will trigger a backlash from labor groups is of concern. In fact, the additional portion should be jointly shouldered by labor and management. If the negotiations fail, there is a high probability that the responsibility will fall on the government's shoulders. This will become a financial bottomless pit and a threat to the government's finances.
The greatest benefit of shifting to an IRA system is that employees will not lose their pension benefits when they change jobs. Also, because the funds will be remitted directly into individual accounts, there will not be the problem of inadequate funding. It will also be difficult for employers to evade their responsibilities. Compared to the existing system, the IRA system should be a better one for a majority of employees. After all, it is a more transparent system and offers more guarantees.
First of all, since the Labor Standards Law came into effect, only around 30 percent of business enterprises have set aside pension funds for their workforces (as required by law). Also, most of them have only set aside the minimal amount required by law -- equivalent to 2 percent staff salaries -- for the pension funds. An additional annuity system may not be able to guarantee the employees' retirement benefits. This will in turn increase the government's burden to make up for fund deficiencies.
Also, the IRAs should be able to guarantee the employees' retirement benefits if the funds set aside in those accounts are invested properly, if their management is not entrusted to a single government-run institution or similarly uncompetitive mechanism, if they can be prevented from becoming a tool for political largesse, and if workers can obtain related financial information on a direct and regular basis.
In fact, entrusting the funds to professional management, or even allowing workers to set up IRA accounts at the authorized financial institution of their choice, is in line with today's trends.
Finally, as life expectancy continues to rise, the pension ages are being pushed back in many countries. The aging of Taiwan's population is also becoming more serious by the day. Current regulations, under which one can get monthly pension payments starting as early as age 55, contravene the recent trends in other countries. In the long run, the government will be ultimately responsible for payments in an additional annuity system. This financial demand could be an unbearable burden for future generations. Detailed and accurate calculations are therefore quite necessary.
Hsu Chen-ming is a professor at the department of economics, National Taiwan University. Huang I-ching is a research assistant at the same department.
Translated by Francis Huang
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