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Woes of bankrupt pension system

Tom Pu-chih Hsieh |

The bankruptcy of public pension funds is an issue worldwide. According to a recent study conducted by Allianz, pension systems in most Asian countries are “fragile and unstable.” 

Hong Kong and Singapore are the only countries in Asia to rank within the top 20 nations worldwide for pension sustainability.

Western countries face the same problem. There is a gap of $78 trillion in pension funds among the 20 richest countries in the world.

In Germany, France, Italy, England, Portugal and Spain, pension fund liabilities amount to more than three times each country&’s national GDP.

In Taiwan, the pension issue is particularly severe. Civil servants have taken to the streets to protest the government’s plan to cut their benefits, while a smear campaign accuses them of causing the pension system&’s woes in the first place. It is unusual that teachers, soldiers and public servants — usually seen as some of the most stabilizing forces in society — should take to the streets and protest their own government.

Of course, it is not fair to make civil servants the scapegoats for the pension system&’s impending bankruptcy. After all, the system was designed by the government. But it is also hard to neglect the fact that in Taiwan, the average monthly pension for civil servants is at least three to four times higher than that of those in the private sector. Not to mention that funds for civil servant pensions are derived primarily from taxes paid by companies and non-public sector workers.

It is similarly difficult to overlook the depravity of a system that allows a retired civil servant to earn a pension three to four times higher than the salary of a hard working young person. These factors have sown discord among the populous. They likewise make it difficult for ordinary workers to lend a sympathetic ear to the retired civil servants asking the government to bail out their pensions. 

If the government follows the doctrine of legitimate expectation and pays retired civil servants what they have demanded, it will crowd out government funding for other social welfare projects. After all, it is not only the pension system for civil servants that is facing bankruptcy.

Dissatisfaction is a natural response from ordinary workers and has allowed the call for cuts to civil servant pension funds to go viral.

It has caused disputes between civil servants and non-public sector workers. Threats to social disorder are growing stronger.

Two major factors threaten the pension systems worldwide: reduced birthrates and the widening gap between the rich and the poor due to economic liberalization. Pension systems require contributions from the workforce to function. If more retired people receive pension payouts and fewer working people contribute to the fund, the system is doomed to fail. That is, unless the government steps in.

This is already happening in developed countries. Baby boomers are now at retirement age but find their pensions shrinking because fewer people are contributing to the pool, a consequence of the reduced birthrate. Baby boomers, especially civil servants, are asking the government to allocate taxpayer funds to the pool to fulfill past promises.

It is estimated that Taiwan&’s pension system for civil servants will be depleted in about ten years if no drastic changes are made to the current system. Some younger civil servants even said they will stop contributing money to the retirement fund, as its imminent bankruptcy means there is little incentive for them to contribute.

Another phenomenon in capitalist counties is growing wealth inequality. In recent years, almost 90 per cent of global wealth has been concentrated in the hands of 10 per cent of the population in the name of economic liberalisation. Although there seems to be a big difference between the economic situations of civil servants and non-public sector workers, actually, in relative terms, both groups belong to the new poor.

A responsible government should never teach one poor group to hate another poor community by identifying the latter as a scapegoat. Irresponsible politicians may seek to divert the public&’s attention from its inability to manage the country&’s finances by creating social conflicts, but they will ultimately face the consequences of tearing the country apart.

Taiwan&’s government is preparing to make laws to alter its Income Replacement Ratio, which is currently the highest on Earth. A retired civil servant in Taiwan usually receives more than 100 per cent of the ratio, while in most countries the ratio usually ranges between 50-70 per cent.

Other methods for pension reform are also up for discussion, such as delaying pension fund contributions until retirees reach a certain age, providing lower payouts to retirees and mandating higher monthly contributions from working people. Besides encouraging systematic reforms to pension funds themselves, a good government should always try to revive the economy and encourage the rich to reinvest their profits in the country.

By creating investment opportunities and urging entrepreneurs to be more aware of their social responsibilities, the gap between the rich and the poor can be narrowed and the government can secure more funding to salvage the pension system.

The writer is Executive Editor, The China Post.