Challenges in social security system

Despite its relatively short history, the social security system in Korea has expanded and matured to the point where it is deeply embedded in society. But there are a number of difficult challenges that still must be tackled in order that it can reach full fruition.

The first issue concerns the effectiveness of the system, that is, whether it is serving its purpose of reducing poverty and inequality. For now, the relative poverty in Korea is rather high among OECD countries (Figure 6-39) and the role of the tax and transfer system extremely limited (Figure 6-40).

Figure 6-39. Relative poverty rate



Figure 6-40. Impact of taxes and transfers in reducing poverty among the entire population

But care is needed in interpreting these data. As explained at the beginning, income distribution is influenced not only by the social welfare system but also by economic conditions and many other institutions and policies. In particular, the apparently meager role of the tax and transfer system in Korea appears mostly attributable to the under development of the NPS. ¹⁾ The problem, however, is that even when the NPS is fully developed, many retirees would not be able to benefit from it because about 40 percent of workers are not currently covered by public pension programs (Figure 6-41).

The low coverage ratio is also observed in the Industrial Accident Compensation Insurance and the EIS. This comes primarily from the prevalence of self-employment and temporary employment in Korea’s labor market (Figure 6-24), with many working at small businesses or in the service sector. ²⁾ Such employment patterns severely limit the government’s ability to include all workers in social insurance programs.

Figure 6-41. Participants in work-related social insurance programs

To enhance the effectiveness of the social security system, efforts should be made to encourage the workers on the margins of labor market to participate in social insurance programs by, for example, reducing their contribution rates. Other important tasks include streamlining the complex programs of public assistance and social services, strengthening the delivery system, and focusing the resources on the most needy.

The second issue is to minimize the adverse impact of the tax and transfer system on work incentives. As explained earlier, the National Basic Livelihood Security Program (NBLSP) has a serious defect in this regard. Of course, it is quite possible that many beneficiaries of the NBLSP are already working in the informal labor market as self-employed or temporary workers, and not disclosing their income to the authorities in order to keep NBLSP benefits. But encouraging people to cheat on the system is in itself undesirable. To reduce the disincentive to work, discussion is underway on reforming the NBLSP by making its in-kind benefits (health care, education, housing, etc.) available to those over the poverty line or by limiting its coverage to those unable to work.

This issue is not, however, restricted to the case of NBLSP. Other programs such as childcare support often bases the amount of benefits offered on the level of household income. The dilemma is unavoidable as long as the government wants to target resources on people in need. Still, attention should be paid to the aggregate impact of various programs on the work incentives of households, which has never been identified to date.

Fortunately, the disincentive to work resulting from the tax system is rather weak, not only because of the large informal labor market but also the low statutory rates of taxation and social security contributions as can be inferred from the tax wedge (Table 6-11). But given the rapid increase in social security contributions (Figure 6-42), it is important to minimize the growth of welfare spending and increase its cost-effectiveness.

This leads us to the third issue of assuring the long-term financial sustainability of the social security system.

Table 6-11. Average personal income tax and social security contribution rates on gross labor income (2008)


Figure 6-42. Trends in tax burden

Of particular concern are the NPS and the NHI. As mentioned before, the NPS is expected to run out of its savings by 2060 and turn into a pure pay-as-you-go system, imposing a heavy burden on future generations. The NHI spending has been increasing over the years (Table 6-6), and is set to increase further due to the rise in income levels, the development of more expensive technologies and equipment, and population aging. It is already costing the government about 4 trillion won (0.4 percent of GDP) each year.28

Table 6-12. Main indicators of the National Health Insurance (1977-2008)

Because there is a limit to increasing the tax revenues and social security contributions, serious efforts are required to constrain the spending growth of the NPS and the NHI, while fulfilling their fundamental roles of securing old-age income and access to affordable health care for the public. ³⁾

The final issue is about redefining the respective responsibilities of individuals and the state in social security system. With ever rising income levels, individuals are better positioned than before to prepare themselves for various risks that used to be the sole responsibility of the state. Private pensions and private health care in particular should be encouraged to play a larger role in this regard.

At the same time, private service providers should be allowed to enter the market for social services such as childcare, education, employment services, job training and health care. Their increased participation, while carrying some risks, can help promote innovation, customer orientation and cost-savings in the delivery of services (Shleifer, 1998;Pearson and Martin, 2005). This does not imply that the state should play a less important role; rather, it should keep financing these services and make sure that service quality and distributional equity is not compromised. ⁴⁾

In summary, greater efforts are needed in the future to enhance the effectiveness of the social security system; to minimize its adverse impact on the incentives to work; to assure long-term financial sustainability; and to redefine the respective responsibilities of individuals and the state and make greater use of private service providers. Korea’s social security system has achieved a lot of progress, and will continue to if these efforts bear fruit.

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

NOTE

¹⁾Workers in countries with mature public pension systems tend to save less and their capital income from savings after retirement tends to be smaller. See Kyung-Mook Lim and Hyungpyo Moon (2003) for empirical evidence on this issue. In these countries, most retirees would be counted as being poor in terms of market income, and public pensions by themselves would play an important role in reducing poverty.
²⁾The coverage ratio rises when the workers legally excluded from participation are subtracted from the denominator. For example, the coverage ratio of the EIS was 39 percent of total workers, 57 percent of wage and salary earners, and 82 percent of eligible workers in 2007 (OECD, 2008, p.126).
³⁾One option for the NPS is to adopt a notional defined contribution system as in Sweden that is immune to macroeconomic and demographic shocks (Palmer, 2008).
⁴⁾An example can be found again in Sweden (Blomqvist, 2004).

References

· Lim, Kyung-Mook and Hyungpyo Moon, “The Impact of Public Pensions on Household Savings,”in Kyungsoo Choi, Hyungpyo Moon, Inseok Shin and Chin Hee Hahn (eds.), Population Aging in Korea: Economic Impacts and Policy Issues, Research Monograph 2003-06, Korea Development Institute, 2003, pp.227-276 (in Korean).
· OECD, OECD Economic Survey: Korea, 2008.
· Palmer, Edward, “Social Policy in an Ageing Society: Trends and Implications,”in Sang-Hyop Lee, Andrew Mason and Kwang-Eon Sul (eds.), Social Policy at a Crossroad: Trends in Advanced Countries and Implications for Korea, Korea Development Institute, 2008, pp.81-107.
· Blomqvist, Paula, “The Choice Revolution: Privatization of Swedish Welfare Services in the 1990s,” Social Policy and Administration, Vol. 38, No. 2, 2004, pp.139-155.