The Liberty Times Editorial: Pension system is unsustainable

Sun, May 12, 2013 - Page 8

Last year, the combined hidden debt at all levels of government amounted to NT$15.67 trillion (US$530 billion), a record high. Most of this was made up of pensions for military personnel, civil servants and public school teachers and labor insurance. The pensions for these three categories of state employees under the old and the new systems account for NT$8.31 trillion of that sum, more than half of all hidden government debt, and labor insurance makes up for NT$6.7 trillion. If the government goes bankrupt, it is because of these state pensions.

This is no alarmist talk. The situation fully explains the urgent need for pension system reform.

Apart from war, another important reason why countries go bankrupt is the heavy burden posed by pensions for military personnel, civil servants and public school teachers.

In Greece, civil servants received 14 months of salary every year and had one month of paid holidays. Every month, they could receive a maximum monthly bonus of up to 1,300 euros (US$1,688), and they could retire at the age of 40 and get a pension at an income replacement rate of 111 percent.

When a civil servant died, their children could continue to receive their parent’s pension, regardless of their marital status.

The European Commission has estimated that by 2050, expenditure on Greek civil servants’ pensions would make up 20 percent of Greece’s GDP.

Of course, the Greek economy is decidedly unhealthy: There is almost no important manufacturing industry and it relies mainly on tourism.

When the economy shrank, it was impossible to increase tax revenue and as a result, the country issued debt to get by. It was only natural that it would not be able to cope with the retirement and welfare expenditures for the public sector, finally making it the first victim of the EU debt crisis.

It is very simple to resolve a deficit: Reduce government expenses. It is also necessary to reform, and the simplest way to achieve results is to streamline the civil service and cut retirement pensions. That is why Greece recently announced that it would cut 15,000 people from its civil service by the end of next year. This was soon followed by an announcement from Portugal, which is doing almost as badly, that it will cut its civil service by 30,000 employees. By implementing a major plan for public spending cuts, the country forecasts it will save 6 billion euros in three years.

President Ma Ying-jeou’s (馬英九) government clearly understands how serious Taiwan’s problems are.

Premier Jiang Yi-huah (江宜樺) sees Greece as a warning and frankly says that if Taiwan’s system for military personnel, civil servants and public school teachers is not reformed soon and their high pension income replacement rate and low contributions continue, then “what happened to Greece could of course one day happen to us, too.”

However, if the current situation is allowed to continue, Taiwan could end up doing even worse than Greece.

When Greece encountered problems, it could ask for assistance from the EU, other eurozone countries and the IMF. However, as Taiwan is internationally marginalized, if the government’s finances were to collapse, we might have nowhere to turn for help.

The Ma administration is aware of this situation, but due to political concerns, its proposed pension reform does not cut to the heart of the issue.

The major thrust of the reform is not directed at pensions for military personnel, civil servants and public school teachers, but at cuts in the labor pension.

The result is that, according to the government’s reform proposal, the lowest monthly pension payment for civil servants is higher than the highest pension for non-public-sector employees. This is not reform — this is finding a scapegoat for the financial collapse. In the eyes of the Ma administration, that scapegoat should be the nation’s non-public-sector employees.

The unreasonable parts of the pension reform proposal must be improved if the we are to find a solution to the problem.

The most criticized part is that the government uses most of its resources to care for military personnel, civil servants and public school teachers, and their benefits include educational subsidies for their children, annual year-end bonuses, performance incentives, a large funeral subsidy of three to five months salary, a wedding subsidy of two months salary, maternity benefits — two months’ salary for each child — and a NT$16,000 annual National Travel Card.

If a civil servant dies, their spouse will continue to receive their monthly pension for the rest of their life, and when salaries are increased for civil servants on active duty, the pensions for retired personnel see a corresponding increase. Retired personnel receive an annual relief bonus, as well as bonuses for the Spring Festival, the Dragon Boat Festival and the Mid-Autumn Festival.

The dispute over the annual relief bonus toward the end of last year revealed that the bonus, astonishingly, cost more than NT$20 billion each year. The preferential interest rate on part of their pension savings currently costs the government between NT$70 billion and NT$80 billion a year. That will increase to NT$140 billion by 2015. If this benefit is not abolished, the government will have to spend another NT$2 trillion or more.

If these inappropriate benefits are abolished and if the income replacement rate — unique in the world — is lowered, a large part of the fiscal black hole could be filled.

The biggest obstacle to reform is the government’s unwillingness to risk a backlash from vested interests. The government’s pension reform is not aimed at the vested interest groups, but is instead victimizing the most disadvantaged workers.

Hoping that the vested interest group will wake up and realize that they should accept reform to benefit others and avoid building debt for the younger generation is unrealistic.

Only if non-public-sector employees wake up and take concrete action to monitor the government so that it stops favoring specific groups, while sacrificing the rights and interest of workers will it be possible to stop reform from going astray.

Translated by Perry Svensson