The truth behind the 18% interest

By Lin Cho-shui 林濁水  / 

Thu, Jan 27, 2011 - Page 8

Examination Yuan President John Kuan (關中) has said that the 18 percent preferential interest rate was designed to alleviate hardship among civil servants during the 1950s and 1960s. When they retired, they only received a few hundred thousand NT dollars in a lump sum and the 18 percent interest provided less than NT$10,000 (US$344) per month. This is true.

According to the Examination Yuan, those who became civil servants after 1995 do not enjoy this interest rate, so their income replacement ratio isn’t excessive. This is also true.

However, why were the civil servants that retired in the early days so pitiful? While they may have done OK after retirement, those who became civil servants before 1995 and retired in the past 15 years are earning more in their retirement than they did when they were working.

Kuan said this was built into the system to protect legitimate expectations. Is this really true? Let’s take a look at some numbers.

A rank 10 civil servant who served for 35 years and retired in 1994 receives about 65 percent of his or her working salary in monthly retirement pay. Compared with other countries, this is not bad, but someone of the same rank and same seniority who retired in 1995 quite magically receives 110 percent of their working salary.

How did that happen? It’s the result of the new retirement law passed by the legislature in December 1992, raising the pension for civil servants. What was so magical about December 1992? That was the month Taiwan held its first full legislative election. That tells us that the preferential interest rate was a big gift to civil servants from all those legislators elected in China prior to 1947 as they finally had to step down.

The gift only included those who began serving as a civil servant prior to, and retired after, 1995.

That raises the question of why those who retired earlier and those who started working after that date were not included. There is a very simple explanation: The system was decided by people who started their careers before, and ended it after, 1995. They were the only ones who were to enjoy this gift, leaving nothing to those who left the civil service earlier or joined it later.

Civil servants in the early years may have been pitiful, but not those who retired after 1979. Prior to 1979, the monthly pension was small and 80 percent of civil servants chose to receive their pension as a lump sum instead of monthly payments; that’s why they received the 18 percent preferential interest rate. From 1979 on, however, the monthly income replacement rate was raised to 65 percent or more of their final salary, causing a sharp increase in the number of people choosing a monthly pension. From 1995 onward, the monthly pension based on the 1992 legal amendment became better still.

That meant that anyone choosing the monthly pension after 1995 also received the 18 percent rate that was designed for those taking a lump sum payment, in effect giving those retirees two monthly pay checks, and the income replacement rate could reach as much as 130 percent of their working salary.

Civil servants drafted the amendment and deliberately distorted administrative orders to benefit themselves by effectively giving themselves two salaries. They got off easily by not being stripped of their positions and investigated, and now they rise as one to claim that the 18 percent interest rate is in accordance with the system and even call for the protection of legitimate expectations, when this very system is proof that they have violated the law.

Now that all of Taiwan is up in arms over the benefit, they say it was because the civil servants in the past were poor. Yes, civil servants of the past were poor, but they are not now. To those poor civil servants the preferential interest rate meant a few extra thousand NT dollars every month. Between 2000 and 2005, the fat cats, exemplified here by former vice president and Chinese Nationalist Party (KMT) chairman Lien Chan (連戰), received an incredible NT$220,000 per month.

The civil servants who retired in the early years get very little out of the 18 percent rate. Their proportion of the more than NT$70 billion that pays for the benefit every year is very small. Most of it simply enriches those already rich officials who retired after 1995.

If this benefit really were used specifically to care for poor officials, then the sum would gradually diminish as their numbers dwindle. That, however, is not the case. In 2005, the cost of the benefit was NT$56 billion, already a frighteningly high figure, but last year, it had ballooned to NT$76.8 billion. It still hasn’t peaked, because it has been estimated that the treasury in the end will have to pay up to the astronomical sum of NT$6 trillion to cover the cost. That is why all these rich officials use “poor civil servants” as an excuse for keeping the 18 percent preferential interest rate to their own benefit, disregarding the impact on the treasury.

It is a display of complete disregard for laws and regulations to let these civil servants receive double salaries. A look at other countries shows that when a country is in financial difficulties, no one claims that these salaries cannot be cut because of the protection of some legitimate expectations. This is not the case for our neighbors, nor is it the case in the US or European countries. The income replacement ratio of 35 percent in Japan, 40 percent in Germany or 51 percent in France, for example, have all come down from 41 percent, 49 percent and 65 percent respectively. In Singapore and South Korea, pensions have been cut. Civil servants under the protection of the mighty KMT are the only ones whose benefits cannot be touched.

At the very least, the following adjustments have to be made.

First, those who retired in the early years and have a low income because they received a lump sum should be allowed to keep the 18 percent preferential interest rate. It would also be too problematic to remove the benefit from those who retired more recently with an income replacement rate of a bit over 80 percent, so they could also keep it, but with an upper limit on the income replacement ratio.

Second, no one with a monthly pension should be given the benefit.

Third, the income replacement rate for all those who receive the benefit based on these conditions should be limited to between 70 percent and 75 percent. This is still quite a good number when compared with other countries.

Lin Cho-shui is a former Democratic Progressive Party legislator.