The Directorate-General of Budget, Accounting and Statistics has reported that “unfunded liabilities” in the pension programs for government employees — military personnel, civil servants and public school teachers — are estimated at NT$8.13 trillion (US$257.5 billion). The report caused discontent among representatives of government employees, who said that the agency should not impugn the groups. The issue involves several misunderstandings that need to be clarified.
First, unfunded pension liabilities are calculated by applying past data on the number of people currently receiving pensions, and refer to the current value of the government’s future payments for government employees’ past services.
For example, take a 45-year-old civil servant who has been insured for 20 years and plans to continue working for another 10 years before retiring. The government simply takes the future payments for the person’s past 20-year service into account when calculating unfunded liabilities, while excluding future payments for his planned 10-year service. This means that the figure is expected to continue growing.
Second, the calculation of unfunded pension liabilities does not assume that all government employees will live to be 100. Rather, the calculation is based on an average life expectancy of 80 years.
According to the Public Debt Act (公共債務法), the more than NT$5 trillion public debt does not include all types of unfunded liabilities — which are estimated to be as high as NT$18 trillion — because they are not contractual loans. Although they are not public debts in a legal sense, the government will still have to clear them, one by one, as time goes by, and it still has to raise the funds required to pay for them when the time comes.
For instance, the government allocates NT$77.8 billion annually to cover the 18 percent preferential interest rate on savings afforded government employees who began their service prior to 1995.
Another example is the 2005 amendment to Article 5 of the Civil Servant and Teacher Insurance Act (公教人員保險法), which requires the government to cover the pensions for government employees’ services before 1999.
In theory, unfunded pension liabilities can be amended through the legislative process. However, in reality it is very difficult for the government to cut pensions due to voter pressure. This means that it has to continue to raise funds to pay for the liabilities in installments, which inevitably crowds out other expenses. Financially, this process has almost the same effect as national debt.
Some remarks by government employees have been quite controversial, as they say that Taiwan would not go into default based on existing national assets and future tax revenue.
First, a nation’s national assets and foreign reserves belong to the public, and such resources should not be defined or monopolized by certain groups. All pension systems should be self-sufficient and should not leave any debt to future generations.
Next, the amount of unfunded pension liabilities is the present value — not the future value — of the future payment for accumulated years of service. Not only will it not generate any positive economic effect, it will also continue to grow.
Judging from the current political environment, future tax revenue might be insufficient to cover future administrative expenses. How will the government pay for unfunded pension liabilities under such circumstances? In addition to the massive national debt, how much more newly increased unfunded pension liabilities will the government have to pay?
In the past “demographic dividend” era — falling fertility rates leading to the labor force temporarily growing faster than the population that depends on it — the scale of hidden liabilities was not too big and it was tolerated by the public. However, as the population aged and liabilities rose rapidly, the scale of the liabilities has exceeded what the working population can support, and the problem that once seemed distant is now right in front of the nation.
Since there are too many people and too few resources, the government has less and less space to deal with the issue. Meanwhile, the global economy has been slowing down. In the face of the aging population, the problem has gradually expanded from a social phenomenon to a financial predicament. Essentially, “cooperation between generations” has turned into “deprivation between generations,” while sowing the seeds of division and conflict between the current and future generations.
Faced with the unavoidable trend toward an aging population and financial difficulties, the nation’s pension systems have come to a historic turning point, as various pension programs are likely to undergo a crisis within the next 15 years.
Even if the nation does not go into default, it will find itself in an awkward situation more similar to that of a credit card debtor. Pension reform is crucial not only to the retired life of the current generation, but also to the survival and economic well-being of the next generation. People should put aside narrow selfishness and think about the nation.
James Lin is a fellow of the Society of Actuaries in the US.
Translated by Eddy Chang
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