President Ma Ying-jeou (馬英九) says that the nation’s pension funds are afflicted by three big problems: inadequate finances, occupational inequality and intergenerational injustice.
At the end of last month, Ma announced reform proposals for the pension system that would affect the interests of millions of those working in the public sector, with the aim of ensuring that the pension system can keep developing sustainably.
The content of the reform proposals does offer improvements, but the plan will not bring an end to existing inequality between public and private-sector employees. The income replacement ratio of pensions for private-sector workers is set to fall.
Let us take the present Labor Insurance (Tier 1) average insured monthly salary for private-sector workers of NT$30,000 (US$1,013) as an example.
The current system bases pensions on the average insured monthly salary for the last five years of employment, so if salaries have increased by 2 percent each year, that will be about 96 percent of NT$30,000, which is NT$28,800.
The government now proposes to change the system so that pensions will be based on the average insured monthly salary for the last 15 years of employment. This means that people whose final salary is NT$30,000 will have their pensions based on 88 percent of that figure, which is NT$26,400.
According to the current system, a worker in such a position will receive a monthly pension of NT$13,392 (NT$28,800 x 1.55 percent x 30 years).
If the new system comes into effect next year, there are two possibilities, depending on which of the two plans proposed by the government is adopted. Under both plans, the retiree would receive a monthly pension of NT$12,276 for the first year of retirement (NT$26,400 x 1.55 percent x 30 years).
The difference is that under plan A, pension payments would be cut by 30 percent starting from the ninth year of retirement, bringing the monthly payment down to NT$8,593. Life expectancy after retirement is 22 years on average. Based on this figure, retirees would receive average monthly pension payments of NT$9,933 throughout their retirement.
Under the present system, the income replacement ratio of a Labor Insurance Fund pension for a worker receiving a final salary of NT$30,000 is 45 percent. This would fall to 33 percent under the government’s plan A, or 41 percent under plan B. If such a worker is lucky enough to receive the lump sum retirement benefits of 45 units of final salary under the old Labor Standards Laws (Tier 2), that will work out as a monthly pension payment of NT$5,114.
Let us recalculate what the pension would be if taking into account the old Labor Standards Laws lump sum retirement benefits (Tier 2). The income replacement ratio under the current system would become 62 percent, and it would be 50 percent under proposed plan A, or 58 percent under plan B. Private-sector workers whose monthly salary is more than NT$43,900 will not receive any higher annuity pension because NT$43,900 is the upper limit for insured monthly salary under the Labor Insurance pension scheme.
The higher a person’s salary, the lower the income replacement ratio of their pension will be, and the faster it will fall after the proposed reforms come into effect.
The income replacement ratio of civil servants’ and other state employees’ pensions is set to stay roughly level. State employees’ (Tier 2) occupational pensionable salary is calculated according to double their base salary, while the (Tier 1) Government Employees’ and School Staff’s Insurance (GESSI) is calculated according to their base salary. Insured base monthly salary under the GESSI is capped at NT$53,075.
If a civil servant’s final salary is NT$60,000, then their basic salary is NT$60,000 divided by 1.55, which is approximately NT$38,710. Based on that figure, they will receive a (Tier 2) occupational monthly pension of NT$50,710, plus (Tier 1) interest under the GESSI of NT$7,806 (including both the preferential 18 percent interest rate and non-18 percent interest).
If the (Tier 1) GESSI lump sum retirement payment is converted to monthly pension payments, as under the old Labor Standards Laws, a monthly pension of NT$13,378 will be received, putting the income replacement ratio at 97.5 percent or 107 percent. The income replacement rate for state employees will remain around the same as it is now.
Following the proposed reforms, the scales will continue to be tipped in favor of state employees.
The income replacement ratio of private-sector workers’ pensions will still be significantly lower than in the state sector. In other words, occupational inequality will still exist.
It is expected that reforms to the Labor Insurance Fund will be implemented next year, whereas reforms to pensions for state employees will not start until 2016 and will be introduced gradually over a 10-year transitional buffer period. Reforms will not be implemented at the same time for employees in the state and private sectors.
The Ma administration claims that its reforms will ensure that the Labor Insurance Fund can go on operating without worries for 30 years while attaining a fiscal balance, yet its proposed reforms will allow the pension fund for public-sector employees to keep running up debts, the burden of which will be borne by future generations. This is a form of intergenerational injustice.
Reforms to the pension system are bound to involve sacrifice. It cannot be done without pain. However, the government cannot expect private-sector workers to make sacrifices to balance the nation’s finances while allowing public-sector employees to nibble away at the wealth of the next generation.
If the Ma government really means to eliminate occupational inequalities and intergenerational injustices, it will take wisdom and determination to achieve it.
James Lin is a fellow of the Society of Actuaries in the US.
Translated by Julian Clegg