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Social Welfare

Social welfare reaches maturity

The economic crisis produced extreme hardships. The unemployment rate skyrocketed to 7 percent in 1998 from less than 3 percent in preceding years. Due to the limited coverage of the EIS, only 10 percent of the unemployed could receive unemployment benefits (Figure 6-38). The Gini coefficient rose by 13 percent from 0.27 in 1997 to 0.31 in 1998 (Figure 6-35).


Figure 6-38. Recipients of unemployment benefits


The increasing unemployment and poverty raised public awareness about the need for a well-functioning social safety net and helped forge a national consensus on the issue. This coincided with the election of Kim Dae-jung as the new president, which represented the first peaceful transfer of power to the opposition in Korea’s postwar history.

In response to the crisis, the government increased wage subsidies to firms that retained redundant workers and expanded vocational training for the unemployed within the framework of the EIS. In March 1998, a public works program was introduced to create jobs directly with public money. This program played a major role during the crisis in providing emergency support to the poor. Unemployed college graduates could also benefit from government-paid internships at private companies.

At the same time, the government made important changes to the EIS and the public assistance program. First, the coverage of the unemployment benefit program of the EIS was extended rapidly in 1998 to firms with at least 10 employees (January), to those with at least 5 employees (March), and eventually to those with one or more employees (October). 1) Since then, the beneficiaries of the EIS have increased in number (Figure 6-38).

Second, a new revised public assistance program, the National Basic Livelihood Security Program (NBLSP), was introduced in 2000. The NBLSP stipulated the state’s responsibility to guarantee minimum living standards for the whole population by providing benefits to households below the poverty line. It has been, however, criticized for discouraging participants from seeking employment because their benefits decline by the same amount as their earnings increase. All types of benefits (health, housing, education, etc.) are given to those below the poverty line, but none at all to those above it. These features impart to the beneficiaries a strong incentive not to work and escape from poverty.

Other important changes under the Kim administration were the consolidation of the various national health insurance schemes into the National Health Insurance (NHI) in 1999 and the revision of the National Pension Act the same year. The latter finally completed the process of bringing all workers under the compulsory system and at the same time adjusted the contribution and benefit scheme to make the program more financially sustainable in the long term. Specifically, the replacement rate 2) was reduced from 70 to 60 percent for participants who had contributed to the NPS for 40 years and earned a wage equivalent to the average among the NPS participants. It also required the government to make a forecast estimate on the long-term financial conditions of the NPS every five years and submit a report to the National Assembly. 3)

While the first NPS reform embodied in the revised Act failed to eliminate the financial instability of the NPS, it was still a remarkable achievement given the difficulties other countries have experienced in their pension reform. Success factors included the very small number of NPS beneficiaries at the time, the public’s concern about the tax burden of future generations, the advocacy role of research institutions such as KDI, and the economic crisis of 1997 that weakened resistance to reforms of any sort.

The Roh Moo-hyun administration (2003-2008) that followed the Kim’s administration (1998-2003) placed an even greater emphasis on welfare policies. 4) Various new programs were added in this period. Among them, the Emergency Relief Program (2006) offers temporary assistance to the households suffering a sudden loss of income. The Long-Term Care Insurance (2008) provides in-kind benefits to the severely disabled older persons. It is funded by a surtax on the contribution to the NHI. The Earned Income Tax Credit (2008) supplements the earnings of low-income workers with cash benefits to encourage their participation in the labor market and support their living conditions. The first benefits were offered in 2009 for earnings made in 2008. The Basic Old-Age Pension (2008) is a public assistance program for the elderly with low incomes. In 2008, 60 percent of those aged 65 or more were to benefit from the program. The target was raised to 70 percent in 2009.
Given the small amount of benefit per recipient, 5) the program invited criticism for spreading scare resources thinly over a large segment of the older population.
Another notable development was the rapid increase in spending for the care and education of pre-school age children starting with the Roh’s administration (Table 6-10).
Spending grew by 43 percent per year in 2002-2010. It had multiple purposes, including securing equal opportunities for children’s educational development, investing in human resources, encouraging child-bearing, and promoting the labor market participation of mothers.


Table 6-10. Spending for the care and education of pre-school age children


In the meantime, the NPS underwent asecond round of reforms in 2007. Based on the result of the long-term financial projection published in 2003 that predicted that the accumulated savings in the NPS would be depleted by 2047, the government began an intense consensus-building process to arrive at a reform formula. The business community preferred a drastic cut in benefits to minimize the growth in contributions, whereas labor unions and civic groups opposed benefit cuts (National Pension Service, 2008). In the end, most parties agreed to the necessity of reform, and a middle ground was found by reducing the replacement rate by 10 percentage point from 60 percent in 2007 to 50 percent in 2008, and then by 0.5 percentage point each year over the next 20 years to arrive finally at 40 percent in 2028.

Despite the reform of the NPS, total welfare spending kept increasing rapidly in this period. In the mid-2000s, it became the largest spending category, surpassing economic affairs, education and defense (See Figure 1-16 in Chapter 1).

It is of interest that all administrations in this period advocated some form of “workfare.” For example, the Kim’s administration adopted“productive welfare” as its slogan and emphasized that while welfare programs should be expanded, they also needed to be structured in away that would allow recipients to develop their own capabilities and eventually become self-sufficient and no longer dependent on state support. However, such rhetoric was not evident in actual policies such as the National Basic Livelihood Security Program, which contained strong disincentives for seeking work.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

NOTE


1)Still, only 10 percent of the unemployed could receive unemployment benefits in 1998 because the eligibility depends on aminimum period of contribution to the EIS. The minimum size of firms subject to the ALMPs of the EIS was lowered to 50 employees (January), 5 employees (July) and one employee (October).
2)The replacement rate is the amount of pension benefit as a percentage of the retiree’s average wage during his working years
3) In addition, the minimum pensionable age was scheduled to rise from 60 to 65 years between 2013 and 2033 (by 1 year every 5years). The contribution rate which had been raised from 3 percent in 1988 to 6 percent in 1993 and 9 percent in 1998 was to stay at that level in following years. The minimum contribution period was reduced from 15 to 10 years for the old-age pension.
4) Another important policy agenda of the Roh’s administration was correcting regional imbalances across the country, which was viewed by many as another form of income transfer policy.
5)In 2010, the maximum benefit was about 80 dollars a month for a single person and 130 dollars for a couple in a country with per capita income of about 1,600 dollars a month.

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