Fri, May 25, 2018 - Page 8 News List

Overhauling the pension system

By Lee Po-chih 李博志

Pension reform is a complicated and treacherous task — sometimes even fatal. Nicaragua, Brazil and Greece are good examples. It is associated with stakeholder ego, fiscal sustainability, economic performance, the state credit rating and, of course, election campaigns.

Soon after her inauguration, President Tsai Ing-wen (蔡英文) announced the establishment of the Presidential Office’s Pension Reform Committee on May 30, 2016. With courage and determination, she is to fulfill the Democratic Progressive Party’s (DPP) long-standing promise to overhaul Taiwan’s pension system.

Through regional forums and a national conference, the committee has taken a bottom-up, transparent and democratic approach to forge a consensus.

Based on recommendations by the committee, the Legislative Yuan passed a package of amendments to the existing pension system on July 27 last year.

The key change is that the annual 18 percent preferential interest rate on a portion of retired civil servants’ savings is to be gradually reduced to zero over 30 months, from 2021, for those who receive their payments in monthly installments.

Retired civil servants who have opted for a lump-sum payment are to see their preferential interest rate drop over six years to 6 percent.

The removal of the 18 percent preferential interest rate constitutes a remarkable achievement for the DPP government. It is estimated that the government would save NT$80 billion (US$2.67 billion) annually.

Currently, retirement payments account for NT$208 billion, or 1.2 percent, of GDP. This ratio is expected to be reduced substantially.

The new law also stipulates that the income replacement ratio is to gradually decrease over 10 years from 45 to 30 percent for those who have worked for at least 15 years and from 75 to 60 percent for those who have worked up to 35 years.

The new law stipulates that the retirement age for civil servants is to increase one year at a time, beginning from 60 in 2021 to reach 65 by 2026. The retirement age of teachers is to increase from 50 to 58 years by July 1 this year. It also guarantees that retired public servants and teachers are to have a pension floor of NT$33,140.

The retirement age should increase to 68 by 2026 because of low unemployment in Taiwan.

Following the global financial crisis in 2008, a lot of Western European countries encountered a rising unemployment problem, with an average unemployment rate of about 10 percent, so it was better for them to adopt a low retirement age, such as Greece and Italy where it is under 60.

However, Taiwan’s average unemployment rate for the past 10 years was only 4.4 percent, which is fairly close to the natural unemployment rate of 4 percent. This implies that Taiwan’s economy has almost reached full employment and that old workforces are not competing with the younger generation in the job market.

Taiwan has 3.3 million people in the 55 to 64 age group, and 3.1 million who are 65 and over. They are all baby boomers born after World War II, between 1945 and 1959. Extending the retirement age to 68 would avoid a shortage of labor by 2026.

Encouraging people to work longer is a sign of economic dynamism and evidence that Taiwanese live healthy, long and happy lives.

The average life expectancy in Taiwan is 76.8 years for men and 83.4 years for women. A retirement age of 68 would still give people plenty of time to enjoy their golden years.

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