There have been reports that the Presidential Office and the Cabinet have decided not to raise the salaries of state employees — military personnel, civil servants and public school teachers. This is a rare instance of the government actually protecting generational justice, as this is not just a matter of NT$22 billion (US$667.5 million) — but rather a matter of leaving NT$250 billion in debt to future generations.
It is simple to calculate that the government’s announcement of a 3 percent hike in state employee salaries would add NT$22 billion to central and local government budgets. However, officials have not divulged how much the increase would add to retirement payments. Is this a difficult calculation, or is it just a matter of laziness?
A closer look into the announcement last year that the debt to make retirement payments stood at NT$8.3 trillion shows the figure was arrived at by adding debt from monthly pensions to debt from future payments to people who are yet to retire. These two numbers are proportional to salary levels. According to regulations, pensions must be adjusted accordingly when state employee salaries are changed.
If state employees get a pay increase of 3 percent, monthly retirement payments would also be increased by 3 percent.
That adds 3 percent to debt to fund pensions, while 3 percent also has to be added to the retirement insurance of working state employees.
This means that a salary increase of 3 percent for state employees adds 3 percent to pension debt, and 3 percent of NT$8.3 trillion is about NT$250 billion in “hidden” debt. This still does not include employees in state-run companies. This is the simplest and fastest way to make the calculation.
Why is there such a huge difference in these numbers?
First, based on actuarial calculations, the premium for the retirement system for state employees should be 42 percent, but regulations restrict the premium to 12 percent.
If salaries are increased by 3 percent today, that would add to the government’s payments based on the 12 percent premium and the debt left to future generations would also increase.
Second, the hidden debt keeps accumulating and must be paid eventually. A salary increase of 3 percent would further increase future annual expenditure.
The NT$250 billion that would have been added to the hidden debt as a result of a state employee salary increase of 3 percent is the result of increased future pension payments. The NT$22 billion visible in the government’s budget is not nearly as frightening as the NT$250 billion that cannot be seen, which will be left for future generations to deal with.
When the Miaoli County Government’s huge debt prohibited it from paying its employees’ salaries earlier this year, that could well have marked the first step toward a Greek-style crisis in Taiwan.
Two weeks ago, the Directorate-General of Personnel Administration announced that only NT$34.3 billion remained in the military pension fund late last year and it forecast that the fund would be exhausted by 2019 — in other words, the fund would be bankrupt by that year.
Prior to that, Minister of Finance Chang Sheng-ford (張盛和) and Directorate-General of Budget, Accounting and Statistics Minister Shih Su-mei (石素梅) said that the burden of social insurance, staff costs and other regulated expenditure are increasing annually and already make up 70 percent of annual government spending, adding that it will become increasingly difficult to allocate budgets.
Perhaps the government, which habitually considers increasing pay for state employees when an election approaches, made the calculation that doing so would scare off more voters than it would win, and perhaps that — rather than an understanding of the seriousness of leaving another NT$250 billion in debt to future generations — was the reason it put on end to the suggestion.
Whatever the reason, it is a good thing that the salary increase was halted. Moving toward fiscal discipline and protecting generational justice is a move in the right direction.
James Lin is a fellow of the Society of Actuaries in the US.
Translated by Perry Svensson
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