On April 25, the Cabinet approved amendments to the retirement pension programs for military personnel, public school teachers and staff and private-sector workers. The amendments will soon be referred to the legislature for deliberation. In response to the proposed amendments, the nation’s eight major labor unions launched a demonstration on Wednesday, Workers’ Day, protesting against what they called “inappropriate reforms” to the labor pension program. Once again, the issue has grabbed everyone’s attention and become a bone of contention between political parties.
The purpose of pension reform is to relieve the government’s financial burden, improve the pension system and secure income for the retired. It should take reliance, protection, fairness and justice into consideration, and should not leave debt to future generations. A reform is a kind of revolution, and the process is almost certain to have a negative impact on some people. However, without it, every pension program would inevitably go bankrupt.
Many wealthy European nations with healthy social welfare systems are facing the problem of an aging population. The generation of “baby boomers” born after World War II has reached the age of retirement, so these nations’ expenditures on social welfare, such as public pensions and senior healthcare, have surged drastically. This has resulted in a huge financial burden, impacted on the construction of infrastructure and restrained economic growth. These nations are now cutting expenses on social welfare and implementing reforms of the retirement pension and social welfare systems.
Take Greece as an example. Due to massive national debt it has created, the generous retirement pensions and lifelong job guarantee of its civil servants is one of the causes of the government’s financial crisis. To lower its deficits, it plans to dismiss 15,000 government employees by the end of next year in exchange for a bailout of 2.8 billion euros (US$3.67 billion).
Data shows that Taiwan spends much more money on social security than many other countries. In the face of the falling birthrate, it is dealing with a rapidly aging society. Meanwhile, the government’s financial situation continues to deteriorate. If it does not make amendments in a timely manner, the continuation of current pension programs will eventually undermine its financial situation.
Although some of the amendments to the pension programs might be questionable, most of them can remedy the unreasonable systemic flaws, because they are based on the principle of expenditure reduction: Paying more, receiving less and taking care of the disadvantaged at the expense of the rich to balance revenues and expenditures.
What is worrying is that the government’s pension reform leans too heavily toward expenditure reduction. Even if it did raise pension insurance premiums, it is likely to go bankrupt in the end, because it offers no concrete method of increasing the economic efficiency of the pension funds or developing other financial resources.
Take the Public Service Pension Fund for example: The average yield over the past decade was just 2.42 percent, which is far below the 7 percent goal that was set when the fund was first established. This is surely one of the reasons why the fund has come under such financial pressure. A more detailed calculation shows that the effect of improving the yield by 1 percentage point would be equal to increasing the contribution rate by 5 percent, which would be quite an improvement.
In the short term, perhaps it might be helpful for the government to lift the funds’ investment ceiling for foreign targets.
Next, it should relax the restrictions on investment targets and be more flexible with is asset distribution and operation. It should also allow the funds to invest in infrastructure, real-estate investment trusts and real-estate to increase earnings.
In the long run, the government should consider incorporating fund management, so it can decide independently over its personnel and finances. In addition, the establishment of a Taiwanese sovereignty fund supported by the nation’s five major funds for military personnel, civil servants, public school teachers, workers and the general public deserves consideration.
For a long time, welfare services have been held ransom to politics, with the result that politicians have been making irresponsible promises, turning Taiwan into a country with low tax revenues and developed welfare services. Since our pension programs are nearing bankruptcy, Taiwan should learn from Greece.
The government must show its determination to reform the pension programs, while the public must take a rational approach to the problem. If pension reform remains mired in political calculations and bargaining over the amendments and we remain unable to push resolutely for reform, the only alternative left is for us to go down together.
Lee Wo-chiang is a professor in Tamkang University’s Department of Banking and Finance.
Translated by Eddy Chang