Asian Public Governance Forum on Public Innovation 9

Asian Public Governance Forum on Public Innovation 9 -10 September 2015, Vietnam Civil Service Pension Reform in Korea Government Employee Pension Research Institute Research Fellow Inbo Song

Contents Ⅰ. Introduction Ⅱ. 2015 CSPS Reform Ⅲ. Policy Implications

Ⅰ. Introduction

1. Rapid Demographic ageing Ⅰ. Introduction In the context of demographic changes, the public pension reform has become a major issue on the agenda of social policy around the world. Korea is no exception. Dependency ratio of the CSPS Life expectancy in Korea 76, 8% 64, 4% 46, 4% 29, 3% 52 years old (1960) -4 - 82 years old (2010) 36, 3% 3, 0% 1990 2014 2020 2030 2040

2. Brief History of the CSPS • The CSPS was set up in the early 1960 s. Ⅰ. Introduction • The National Pension Scheme (NPS) was implemented in the late 1980 s. Occupational Pension Schemes Civil Service Pension Scheme (CSPS) Military Pension Scheme (MPS) Private School Teachers Pension Scheme (PSTPS) National Pension Scheme (NPS) Year of inception 1960 1963 1975 1988 Coverage Civil Servants (Central & Local govt) Military Personnel Private School Teachers General Public *exclusive to occupational pensions 108 18 28 2, 074 39 8 5 345 Category Participants (in ten thousands) Pensioners -5 - (in ten thousands)

3. Basic Structure of the CSPS Ⅰ. Introduction (Retirement Pension Benefit) • The benefits of the Retirement Pension are based on a Defined Benefit (DB) plan • Annual expenditure is financed by Annual contributions of employees (civil servants 7%) and employer (gov’t 7%) (PAYG Plan) • Financial shortage has been subsidized by the gov’t budget since 2001 Financial status of 2014 (in trillion won ) -6 - Total Expenditure Employee contribution Gov’t (employer) contribution Subside from gov’t budget (7%) (shortage) 10. 2 4. 2 3. 5 2. 5

Ⅱ. 2015 CSPS Reform

1. The Need for Pension Reform Ⅱ. 2015 CSPS reform • The CSPS began to face financial shortage from the mid-1990 s and the deficit was subsidized by the gov’t general budget. In spite of past reforms, the deficit continued to increase significantly. (unit : trillion KRW) Pension deficit (subsidized by the gov’t budget)) 0. 05 2001 2. 9 1. 3 0. 6 2005 2010 2015 • Moreover, the CSPS has been criticized by pension inequalities between the general public and civil servants (Pension Jealousy). Pension MWR CSPS NPS 2. 08 times 1. 5 times * Note: MWR is defined as the ratio of present value of expected pension benefits to the present value -8 - of expected contribution

2. Pension Reforms before 2015 Ⅱ. 2015 CSPS reform In order to tackle these challenges, the Korean Government has launched to reform the CSPS since the mid-1990 s. 1) 1995 reform - Raising contribution rates from 7. 2 percent (gov’t: 3. 6%, employee: 3. 6%) to 9. 8 percent (gov’t: 4. 9%, employee: 4. 9%) - A normal retirement age of 60 for new entrants from 1 Jan 1996 - Expansion of the range of the retirement earnings-test applicants to all pensioners who are working at the public sector -9 -

2. Pension Reforms before 2015 (con’t) Ⅱ. 2015 CSPS reform 2) 2000 reform - Raising contribution rates from 9. 8 percent (gov’t t: 4. 9%, employee: 4. 9%) to 11 percent (gov’t : 5. 5%, employee: 5. 5%) - Applying the retirement age for current staff - Shifting pension index from salary base to CPI - Changing the pension formula from final to final 3 year average - 10 -

2. Pension Reforms before 2015 Ⅱ. 2015 CSPS reform (con’t) 3) 2009 reform - Changing the reference wage from pensionable wage to taxable wage - Raising the contribution rate from 11 percent (gov’t: 7%, employee: 7%) to 14 percent (gov’t: 7%, employee: 7%) - Changing the pension formula from final 3 average to career average - Reducing the annual accrual rate from 2. 1 percent to 1. 9 percent - Delaying the minimum retirement age from 60 to 65 for the newly recruited only * for the incumbent : the previous term (age 60 or at the time of normal retirement) applies - Reducing survivors pension from 70 percent to 60 percent for the newly recruited only * for the incumbent : the previous term (70% of retirement benefit) applies - 11 -

3. Important Developments of the 2015 Reform Ⅱ. 2015 CSPS reform - 12 - 25 February 2014 President proclaimed the civil service pension reform intention. January ~ June 2014 The state-run think tanks have conducted reform plan projects. March ~ June 2014 The Korean gov’t has run 「Civil Service Pension Reform Committee」 April ~December 2014 The ruling party has also examined civil service pension reform plan. 17 October 2014 The Ministry of Personnel Management proposed the Gov’t plan 28 October 2014 The ruling party submitted the civil service pension reform bill.

2. Important Developments Ⅱ. 2015 CSPS reform - 13 - (con’t) 29 December 2014 In the Parliament, two committees, the pension reform committee as well as the tripartite committee, began to review the reform bills. January ~ May 2015 Two committees have held tripartite talks for more than 50 times. 2 May 2015 The ruling party & opposition parties agreed on the amendment bill. 29 May 2015 The revised civil service pension act was passed at a plenary session.

3. Main Features of the 2015 Reform ▶ Increasing contribution rates for gov’t employees & the employers Ⅱ. 2015 CSPS reform After Before 7. 0% 9. 0% (with transition periods) - 14 - 7. 0 8. 0 ’ 15 ’ 16 8. 25 ’ 17 8. 5 ’ 18 8. 75 ’ 19 9. 0 ’ 20

3. Main Features (con’t) ▶ Reducing annual accrual rates Ⅱ. 2015 CSPS reform Before 1. 9% • with 30 years’ service pension amounts to 57 of career average After 1. 7% • with 30 years’ service pension amounts to 51% of career average with 20 years’ transition (step by step decrease) - 15 -

3. Main Features (con’t) ▶Introducing income redistribution function Ⅱ. 2015 CSPS reform Before None (pure income-related pension) - 16 - After Yes (applies to accrual rates 1%) ◈ As a result, the whole pension benefits are equal to the sum of P 1 and P 2

3. Main Features (con’t) ▶Lowering the pensionable salary cap Ⅱ. 2015 CSPS reform Before 1. 8 times of average pensionable salary After 1. 6 times of average pensionable salary The pensionable salary cap is revised to prevent excessively high benefits. - 17 -

3. Main Features (con’t) ▶Lowering minimum service years Ⅱ. 2015 CSPS reform Before 20 years After 10 years - The minimum service years for the pension is lowered a) to harmonize the condition with the National Pension Scheme (NPS) b) to strengthen the social security rights of the civil servants - 18 -

3. Main Features (con’t) ▶Increasing maximum service years Ⅱ. 2015 CSPS reform Before 33 years After 36 years (with transition periods) - 19 - Years of service (as of 1 January 2016) Maximum Period More than 21 years 33 years 17 yrs ~ 21 yrs 34 years 15 yrs ~ 17 yrs 35 years Less than 15 years 36 years * The interim measures are needed to prevent over-payments.

3. Main Features (con’t) ▶Raising retirement age for a full pension Ⅱ. 2015 CSPS reform Before Appointed before 2010 : 60 yrs Appointed from 2010 : 65 yrs After 65 years old regardless of the date of appointment. • 61 yrs(2022) → 65 yrs(2033) ※ raises 1 years every three years since 2022 - 20 -

3. Main Features (con’t) ▶Reducing the level of a survivors pension Ⅱ. 2015 CSPS reform Before 70% Of old-age pension After 60% of old-age pension • doesn’t apply to the current survivors pensioners - 21 -

3. Main Features (con’t) ▶Freezing a Pension indexation temporarily Ⅱ. 2015 CSPS reform Before Adjusts for CPI every year After Freezes pensions for 5 years (2016 -2020) * CPI-indexation will be resumed from 2021 - 22 -

3. Main Features (con’t) ▶Strengthening the retirement earnings-test Ⅱ. 2015 CSPS reform (Limit bracket) Average salary (private worker) (3, 380, 000 Korean Won) (Target) Income from wage or Earnings from self-employment (Real estate rental income excluded) - 23 - After Before (Limit bracket) Average pension (civil servant) (2, 240, 000 Korean Won) (Target) Income from wage or Earnings from self-employment (Real estate rental income included)

3. Main Features (con’t) ▶Dividing pensions on divorce Ⅱ. 2015 CSPS reform Before None After Dividing pension rights in a divorce is allowed ◈ The pension right is equally divided, whereas the proportion of split can be determined by the two parties or the court order in advance. ◈ An ex-spouse can receive the split pension when he (or she) becomes 65 years old and the amount is proportion to the marriage periods. - 24 -

3. Main Features (con’t) ▶Introducing of a non-job related disability pension Ⅱ. 2015 CSPS reform Before None After Yes • 50% of a job related Disability Pension ◈ The previous (job related) disability pension continues to exist only for the job related injured. - 25 -

4. Summary Ⅱ. 2015 CSPS reform category contribution rate (civil servants & gov’t respectively) accrual rate - 26 - Before Reform After Reform 7% 1. 9% per year * 9% (step by step) 2016 8% → → 2017 8. 25% 2019 8. 75% → → 2018 8. 5% 2020 9% 1. 7% per year (lowers step by step) * 20161. 878% → → 20201. 79% 20301. 72% → → 20251. 74% 20351. 7% income redistribution - yes (1% part in the whole accrual rates 1. 7%) pensionable salary cap 1. 8 times of average salary 1. 6 times of average salary minimum service years 20 years 10 years maximum service years 33 years 36 years (raises step by step) retirement age for a full Pension appointed before 2010 : 60 yrs appointed from 2010 : 65 yrs 202261 65 yrs (raises step by step) → 202462 → 202763 → 203064 → 203365

4. Summary (con’t) Ⅱ. 2015 CSPS reform category before the reform after the reform survivors pension 70% of old age pension benefit 60% of old age pension benefit pension indexation consumer price index 5 -years freeze (2016 ~ 2020) earnings test - 27 - limit bracket : average salary (3, 380, 000 KRW) limit bracket : average pension (2, 240, 000 KRW) target: income from wage or earnings from self-employment (real estate rental income excluded) (real estate rental income included) pension division on divorce - yes none-job related disability pension - yes

Ⅲ. Policy Implications

1. Financial Perspective Ⅲ. Policy Implicatio ns • The accumulated pension deficit is expected to decrease by 40% • The accumulated government payment is estimated to decrease by 17% • The future generation’ financial burden would be relieved significantly. (unit : trillion KRW, constant value of 2015) before the reform Pension deficit (A) - 29 - Government payment (B) after the reform Pension deficit A” In contrast to the past (A-A")/A Government payment B" In contrast to the past (B-B")/B 2016~2055 572 917 322 -44% 740 -19% 2016~2065 761 1, 227 440 -42% 1, 007 -18% 2016~2075 986 1, 584 583 -41% 1, 312 -17% 2016~2085 1, 238 1, 987 741 -40% 1, 654 -17%

2. Pension Equity Perspective Ⅲ. Policy Implicatio ns • The cost-benefit structure and benefits levels of the CSPS and the NPS became almost the same, enhancing pension equity with the NP. CSPS MWR • NPS (benefit/contri- before the reform after the reform bution) 2. 08 1. 48 1. 5 Consequently, the reform would settle down a long-standing reform agenda, ‘Pension Jealousy’ problem between the civil servants and general public. • Moreover, pension redistribution feature would also relieve an equity problem between the high-incomers and the low-incomers in the civil service society. - 30 -

3. Pension Politics Perspective Ⅲ. Policy Implicatio n • Unlike past reforms, the 2015 reform was done via social compromise and consensus. Since 2013, Social conflict regarding civil service pension had become severe - 31 - All persons concerned including lawmakers, gov’t officials, union members, experts & civic activists have participated in the negotiation structure. Finally, all parties came to a social agreement, which is based on mutual understanding & concession.

4. Other Policy Implications • The benefits were internally decomposed into National Pension Equilibrant, Ⅲ. Policy Implicatio ns Occupational Pension Equilibrant and Self-saving Equilibrant. before the reform after the reform Unclear Mixture of National Occupational Pension equivalent : 0. 4% Pension, Occupational Pension and Self-saving • ⇒ Self-saving(4. 5%) equivalent : 0. 3% (Benefit : 1. 7% National Pension(4. 5%) equivalent Contribution : 7%) : 1% As a result, the benefit structure of the CSPS would be more transparent and comparable to a considerable degree. • As pension benefits are to be frozen for next five years, the pensioners would share in the pains suffered by active civil servants and the future tax-payers. - 32 -

In overall, the 2015 reform turns out to be the strongest and the most constructive among civil service pension reforms carried out for the last several decades

Thank You