Sat, Feb 23, 2013 - Page 8 News List

Pension reform retains inequality

By James Lin 林奇璋

President Ma Ying-jeou (馬英九) says that the nation’s pension funds are afflicted by three big problems: inadequate finances, occupational inequality and intergenerational injustice.

At the end of last month, Ma announced reform proposals for the pension system that would affect the interests of millions of those working in the public sector, with the aim of ensuring that the pension system can keep developing sustainably.

The content of the reform proposals does offer improvements, but the plan will not bring an end to existing inequality between public and private-sector employees. The income replacement ratio of pensions for private-sector workers is set to fall.

Let us take the present Labor Insurance (Tier 1) average insured monthly salary for private-sector workers of NT$30,000 (US$1,013) as an example.

The current system bases pensions on the average insured monthly salary for the last five years of employment, so if salaries have increased by 2 percent each year, that will be about 96 percent of NT$30,000, which is NT$28,800.

The government now proposes to change the system so that pensions will be based on the average insured monthly salary for the last 15 years of employment. This means that people whose final salary is NT$30,000 will have their pensions based on 88 percent of that figure, which is NT$26,400.

According to the current system, a worker in such a position will receive a monthly pension of NT$13,392 (NT$28,800 x 1.55 percent x 30 years).

If the new system comes into effect next year, there are two possibilities, depending on which of the two plans proposed by the government is adopted. Under both plans, the retiree would receive a monthly pension of NT$12,276 for the first year of retirement (NT$26,400 x 1.55 percent x 30 years).

The difference is that under plan A, pension payments would be cut by 30 percent starting from the ninth year of retirement, bringing the monthly payment down to NT$8,593. Life expectancy after retirement is 22 years on average. Based on this figure, retirees would receive average monthly pension payments of NT$9,933 throughout their retirement.

Under the present system, the income replacement ratio of a Labor Insurance Fund pension for a worker receiving a final salary of NT$30,000 is 45 percent. This would fall to 33 percent under the government’s plan A, or 41 percent under plan B. If such a worker is lucky enough to receive the lump sum retirement benefits of 45 units of final salary under the old Labor Standards Laws (Tier 2), that will work out as a monthly pension payment of NT$5,114.

Let us recalculate what the pension would be if taking into account the old Labor Standards Laws lump sum retirement benefits (Tier 2). The income replacement ratio under the current system would become 62 percent, and it would be 50 percent under proposed plan A, or 58 percent under plan B. Private-sector workers whose monthly salary is more than NT$43,900 will not receive any higher annuity pension because NT$43,900 is the upper limit for insured monthly salary under the Labor Insurance pension scheme.

The higher a person’s salary, the lower the income replacement ratio of their pension will be, and the faster it will fall after the proposed reforms come into effect.

The income replacement ratio of civil servants’ and other state employees’ pensions is set to stay roughly level. State employees’ (Tier 2) occupational pensionable salary is calculated according to double their base salary, while the (Tier 1) Government Employees’ and School Staff’s Insurance (GESSI) is calculated according to their base salary. Insured base monthly salary under the GESSI is capped at NT$53,075.

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