Thu, Jan 24, 2013 - Page 8 News List

Taiwan could face own ‘fiscal cliff’

By Lee Wo-chiang 李沃牆

Taiwan has been swept by a wave of anxiety about the possibility that its national pension fund could go bankrupt. Although the plot in this case is not as dire as the ongoing European debt crisis drama and has not dragged on so long, it has been playing for a while now and shows no signs of stopping just yet.

If an adequate policy response is not found soon, the pension-fund factor could turn out to be the last straw that breaks Taiwan’s financial back.

A few days ago, Examination Yuan President Kuan Chung (關中) identified a number of directions that could be taken in reforming pensions for public functionaries and public teachers.

These included defined benefit and contribution plans, lowering the income replacement rate (the ratio of pension payments to pre-retirement income), raising the age at which pensions begin to be paid and raising the rate of return on pension fund investments.

These ideas seem to offer a glimmer of hope for pension reform, but there are still too many variables for anybody to be sure whether these measures can be carried through.

How bad has Taiwan’s financial situation really become?

According to the most recent national debt clock figures released by the Ministry of Finance, as of the end of last month the central government’s total outstanding debt with maturity of one year and above, including government bonds and long-term borrowing, came to NT$4.9495 trillion (US$171 billion) and its outstanding short-term debts (treasury bills and short-term borrowing) stood at NT$275 billion.

This represents a debt of NT$224,000 for each person in Taiwan.

However, what is really worrying is not the growth in the average debt borne by each person, but the fact that outstanding government debt as a proportion of GDP keeps increasing year after year.

The debt-to-GDP ratio rose from 16.1 percent in 1996 to 29.59 percent in 2006 and is forecast to reach 36.52 percent this year. If government borrowing is not brought under control, this number will soon reach and exceed the legally prescribed government debt ceiling of 40 percent.

Another aspect is that the national debt figures quoted above are compiled according to the definitions set out in the Public Debt Act (公債法).

They include non-self-redeeming debt with maturity of one year and above, but they do not include self-redeeming debt or debts associated with various non-profit funds.

If the nation’s national debt figures were compiled according to the definitions used by the IMF, then national debt in the broad sense would include hidden debts such as all forms of debt incurred by government departments, state-run enterprises and government funds; including government bonds, government loans, social insurance benefit payments, pension payments and so on.

The Control Yuan made an appraisal of the central government’s hidden debt in a report issued in 2010 proposing corrective measures for the Cabinet and the Ministry of Finance.

The report pointed out that pensions for retired military personnel, public functionaries and public teachers came to more than NT$8.6 trillion.

There was a shortfall in social-insurance deposits of more than NT$4.8 trillion; arrears in insurance-premium subsidies for social-insurance programs stood at NT$120 billion and compensation for land expropriated to build roads came to NT$2 trillion.

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