Old dogs require new tricks for pensions

By Lai Chen-chang 賴振昌  / 

Tue, Nov 27, 2012 - Page 8

When President Ma Ying-jeou (馬英九) met with the premier, the legislative speaker and the president of the Examination Yuan, the combined age of this distinguished group exceeded 200 years. It was quite astonishing to see such an old group of people decide future insurance fees for today’s 20-year-olds.

The most frequent questions I have heard asked in recent meetings with young people concern why the next generation should pay for the shortfalls of retirement pension policies, and why the government is incapable of admitting its mistakes and coming up with a new plan for a fair insurance system.

Regardless of whether the current inadequacies of pension systems are a consequence of bad design, inappropriate management or lack of planning by a fund manager, they have resulted in costs that cannot be recovered and therefore have nothing to do with future decision making.

Any plan to reform pension systems that cling to these past mistakes and attempt to place responsibility for shortfalls on the current or future workforces will clearly be unfair. Such a plan might also cause the intergenerational tolerance the government is trumpeting to deteriorate into an intergenerational nightmare.

Take the Labor Insurance Fund as an example. To make up for the fund’s current shortfall, its contribution rate would have to be raised from the current 6.5 percent to 28 percent, while the future substitution rate would have to be cut from 1.55 to 1.38.

Today’s young people would have to pay a lot into the fund, but receive little in return. This would only increase resentment and make it all but certain that it would be difficult to gain acceptance for any pension reform plan.

In order to build a social security system and allow the public to feel confident about the creation of a new social insurance mechanism, the most pragmatic approach would probably be to simply accept the losses. A clear separation between past mistakes and the future balance of payments should be made, and we should learn from past mistakes and carefully and cautiously design a new, fair and reasonable system for pension contributions.

Accepting past insurance fund shortcomings is necessary if one wants to ask the authorities to investigate and seek compensation for their bad design, oversights and irregularities in fund management.

Not doing so and letting the next generation shoulder responsibility for the previous generation’s losses would mean that it would be easy to cover up irregularities arising from incomplete planning, and this would create more social injustice.

One way for the government to accept and provide compensation for the financial shortfall it has created — in accordance with the requirements for intergenerational justice — would be for it to allocate budgetary funds to be monitored by the legislature or handled jointly by the current generation.

If disadvantaged groups were to incur losses because of a system review, the government could initiate social welfare measures in order to bring about sound and stable reform.

Lai Chen-chang is the president of the National Taipei College of Business.

Translated by Perry Svensson