As next year’s presidential election draws nearer, Chinese Nationalist Party (KMT) contenders are declaring their stance on pension reform, saying they would push for “a second pension reform” to ensure “procedural justice,” and that the government must meet its commitments, respect the principle of legitimate expectations, improve pension fund management efficacy and not pass on debt to future generations.
The Council of Grand Justices next month is to issue a constitutional interpretation on the cuts to pensions for civil servants and public-school teachers. Before it does, a few blind spots needs clarifying:
Groups opposed to pension reform say that they are unconstitutional because they contravene the government’s commitment to the legitimate expectations of retired public servants — military personnel, civil servants and public-school teachers. This raises the question of whether the government must fulfill legitimate expectations of public servants alone rather than of the whole nation.
When the retirement pension system was established by the now-defunct civil servants retirement act in 1992, the allocation rate was only 8 to 12 percent of the salary. It has remained at those levels, never reaching 30 percent, which, according to recalculations over the years, is the approximate percentage needed to balance the fund’s income and expenditure. That made it unavoidable that the fund would go bankrupt and pass debt to future generations.
In late 2015, the hidden debt for pension payments to about 1 million retired public servants was NT$8.2 trillion (US$263.9 billion), while the government’s annual tax revenue is a mere NT$1.8 trillion. The debt-to-income ratio is disproportionate and will eat up social resources and affect the lives of future generations.
Anti-pension reform groups are entitled to call on the government to ensure their legitimate expectations, but others have the same right to make the same demand.
Should commitments regarding disproportionate benefits be protected under the principle of legitimate expectations in the long term? The position of anti-pension reform groups regarding their legitimate expectations and government commitments is incompatible with their view that debt should not be passed to future generations; they must choose one or the other. Unless every individual is entitled to their legitimate expectations, no legitimate expectation can be absolute.
The KMT hopefuls propose improving pension fund management efficacy and raising the rate of return. However, the low return rate is not the key factor in the fund’s looming bankruptcy — the severe allocation shortage is. Raising the return rate would be ideal, but it is also the most unrealistic approach and would have limited effect.
A pension fund with a few hundred million New Taiwan dollars might seem huge, but compared with hidden debt of trillions, it is a drop in the ocean.
With time, withdrawals will drain the fund, so how can bankruptcy be avoided? It is like personal financial management: Without funds, there is nothing to manage.
Trying to solve a huge debt by raising the return rate will only make things worse. After all, how does someone who is bankrupt pay off their debt through financial investment? A high rate of return is a long-term strategy that could be discussed, but never relied upon. It represents either higher risk or an unrealistic approach, and should not be treated as a way to save the pension system at the current stage of reform.
People campaign against pension reform to protect their legitimate expectations, but the allocation shortage was written into law 30 years ago, creating the hidden debt and the fund’s imminent bankruptcy. Retirement requires guarantees of an appropriate living standard, not a legal commitment to provide an income replacement of more than 90 percent, which gobbles up social resources.
In Constitutional Interpretation No. 485, which dealt with public housing benefits for military personnel and their families, the Council of Grand Justices said that “in light of limited state resources ... the rules governing the ways and amount of provision should also seek to be consistent with the basic needs of beneficiaries, and not to exceed the extent necessary for welfare purposes and thus result in overprovision.”
James Lin is a fellow of the Society of Actuaries in the US.
Translated by Chang Ho-ming
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