Now that the government has finished drafting its pension reform paper, the battle over its final form is set to commence in the legislature. Workers’ groups took to the streets on Wednesday — International Workers’ Day — to protest the proposals. Workers are angry that their living standards, far from improving, are falling to those they were at years ago. The logic of the official response was that there will only be something left for future generations if people are prepared to accept a degree of austerity right now.
In this reform package the government has opted to go with Plan B, reducing the income replacement rate (IRR) percentage base that is multiplied by years worked to calculate one’s final IRR. This base rate is to remain at the current figure of 1.55 percent on salaries up to NT$30,000, but will fall to 1.33 percent on salaries of NT$30,000 to NT$43,900.
The proposals also say that the insurance premium rate is to gradually rise from the current 9 percent to 18.5 percent, with incremental annual increases and a review when it reaches 12 percent.
The Democratic Progressive Party (DPP) wants this to be capped at 16.5 percent, together with the requirement that pension reform for retired publicsector workers — state school teachers, military personnel and civil servants — is completed before private-sector pension reform is tackled, in an attempt to decrease the gap between public and private-sector pensions in this wave of reforms.
Clearly, both the governing and opposition parties have, regardless of their conclusions, focused on a subtractive logic: “pay more, receive less, receive it later.”
The main objective in this is to get the insurance fund back to a healthy position financially, and to re-establish the public’s trust in the social insurance fund that it will not go bankrupt.
However, these reforms have been decidedly muddy on the issues of intergenerational justice, professional mobility and the falling birth rate.
The labor insurance IRR Plan B, for example, is generous to workers with low salaries, but not at all kind to those with higher salaries — although when we say higher salary, we are talking of a maximum of NT$43,900 — creating an intra-generational transfer of wealth, as opposed to the Plan A approach in which, when one has exhausted one’s accumulated paid-in contributions, one’s pension reverts to a lower IRR, with the implications of this for the intergenerational transfer of wealth. This would have had too much of an impact on too many souls, and this is why that plan was dropped.
It is a pity that this set of pension reforms will not touch upon the private pension schemes that exist above and beyond the basic state pensions: The government could have used fiscal and tax incentives or deferred tax incentives to offset the parts of the reform that workers believe will harm them.
This would not only revitalize the commercial pensions market, but would also make the public feel that it is getting something to compensate for what is being taken away.
Second, despite the inevitability of having to push back the retirement age in line with the current trend, one cannot take the impact that this will have on professional mobility within the labor market too lightly. Remember that the previous labor insurance system incorporated a component allowing one to increase — or reduce — the size of one’s pension, depending on years worked.
For example, the public-sector pension system allowed people who wanted to change their profession and move into the private sector to opt for a reduced pension and leave their job, and the scheme, earlier.
In the same way, encouraging professional mobility will make it easier for citizens in different professions to change jobs and gravitate to jobs and sectors that better suit their skills and requirements, and this will improve work efficiency and increase production capacity. This approach is based more upon the logic of addition.
Unfortunately, at the time of writing, plans to establish a “portability” pension system, in which accumulated qualifying years are transferable from one profession to the next, have largely been neglected.
In addition, many NGOs promoting the rights of workers with low incomes are advocating the creation of a universal pension fund providing for everyone, regardless of profession, because at present the national pension fund is no more than a form of social welfare for non-workers.
They want this national pension fund to be incorporated into a universal pension fund to be handled by the proposed national pension bureau that is to fall under the future department of health and social security. However, little is to come of this in the current reforms.
By comparison, as part of the 2007 state pension reforms carried out in South Korea, a mother stands to receive 12 months of additional pension points when she gives birth to a second child, and up to another 18 months if she has three of more children. In this way, the pension reform actually encourages families to have more children, and therefore an increase in the birth rate.
This wave of pension system reforms has failed to put any pro-active plans in place to address Taiwan’s current demographic trends of the low birth rate and aging population. It does not make sense to make savings today if we are not continuing to be productive tomorrow. No matter how much we save, and how much healthier the pension fund becomes, if nobody is actually being productive further down the line it will do us little good. Therefore, a pro-active pension system is needed, not some simplistic attempt to address the poor pension fund finances.
Success or failure of the social insurance pension system reforms rests on more than whether a solution can be found for the looming bankruptcy of the fund 20 years down the line. If it were that simple, it would just be a case of outsourcing social insurance to the private sector, and yet no advanced nation has opted for that type of reform.
On the other hand, a combination of state and private pension schemes has already become a popular model for pension reform in these countries. According to the Social Europe study, pension reforms attempting cutting state pensions and private pension plans have foundered.
Social insurance needs to be in the public interest, and thus needs to have prospects for the future.
This is no time for short-termism. In addition, the pension system needs to be a generational contract, backed by state intervention, a social contract similar to the marriage vows made between the bride and groom at their wedding: “Do I, the worker, take this labor insurance as my rock and shelter, and from this day forward, in the pension fund’s financial sickness and health, for better or for worse, promise to pay high insurance premiums and remain faithful to the principle of social insurance, till retirement do us part?”
At this time, when we are going through this process of pension reform, this is a question each and every citizen of this country must ask themselves.
Edward Wu is an associate professor of social welfare at National Chung Cheng University.
Translated by Paul Cooper
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