In this blog post, we will look at how public pensions complement the limitations of private pensions and public assistance and function as a social safety net.
The purpose of the pension system is to ensure a certain level of income when an individual is no longer able to participate in economic activities due to old age, thereby promoting economic stability. Such a system serves as an important social safety net that reduces the economic uncertainty that individuals may face in old age and helps them lead a stable life. In particular, the importance of the pension system is becoming more prominent as we enter an aging society. As the need for a pension system is growing day by day as the responsibility for supporting the elderly has gradually shifted from the family to the individual, the need for a pension system is growing.
To do this, you can use private pensions from insurance companies or public assistance that the government operates with taxes. Private pensions are operated according to market principles, in which individuals prepare for their own old age. On the other hand, public assistance is provided by the government as a social safety net and serves to guarantee a basic standard of living. However, these two systems alone are not enough to guarantee the retirement of all citizens. Why does Korea implement a public pension system in addition to these two systems?
This is due to the side effects of private pensions and public assistance. Private pensions are subject to adverse selection. People who are unlikely to have a stable retirement life tend to join the system, while those who can have a stable retirement life tend to avoid joining the system. This is a structural problem with the private pension system, which causes the total amount of pension payments to keep increasing compared to the total amount of insurance premiums paid. In this case, the insurance company will not be able to maintain the private pension unless it keeps raising the insurance premiums. This situation reveals the imperfection of the market economy and can further exacerbate social inequality.
On the other hand, public assistance can cause moral hazard. Public assistance is a system in which the state provides cash or goods or offers free benefits to enable people who are unable to live on their own to live at the lowest possible standard of living. This is because public assistance is provided free of charge, and people may be inclined to spend all their income in their youth and then rely on public assistance in their old age. To counteract this side effect, the public pension system forces people with income to join and collects insurance premiums. The accumulated pension funds are managed by the state and then paid out as a pension after the subscriber retires. This method is significant in that it ensures that all citizens have a stable old age through social solidarity, rather than individual responsibility.
In South Korea, the process of operating the public pension system is a clash between those who value social solidarity and those who value economic performance. Specifically, the former argues that this system should be used as a means of income redistribution between classes and generations. People who pay less in insurance premiums because they have lower incomes are paid pensions similar to those who pay more in insurance premiums. In addition, the idea of covering the pensions of the elderly generation with the insurance premiums of the younger generation can be understood from this perspective. This can be seen as an effort to care for the socially disadvantaged and to achieve social equality.
However, the latter criticizes that income redistribution that forces some members of society to make sacrifices should only be allowed when it can guarantee the real value of pensions in light of rising prices. As the income gap within society widens and the burden of insurance premiums on the next generation increases, this criticism is bound to become stronger. This criticism emphasizes the need for a rational operation that reflects economic reality if the pension system is to be sustainable in the long run.
These two positions are also in conflict regarding the investment direction of pension funds these days. The latter position regards pension funds as trust funds that subscribers entrust to ensure their income in old age. The dominant attitude has been to maximize returns by investing in large companies through stable financial markets. However, the former position regards pension funds as investment funds that the entire nation has raised for social development. The argument that this should be invested in socio-economic areas linked to job creation is gaining ground. This is an attempt to expand the group of income earners who pay insurance premiums by amending the relevant laws that have so far defined pension funds as a kind of trust fund. It is also an argument that this huge amount of money should be used directly.
In conclusion, the public pension system in Korea is not just a function of guaranteeing income in old age, but is also an important social mechanism for finding a balance between social solidarity and economic performance. The direction of the pension system in the future should be designed more precisely based on these social and economic considerations.
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