Taking on Taiwan’s ruinous and partisan pension system
Economist – May 18th 2017
THE protests outside parliament got so ferocious that the 2,000 policemen defending the building barricaded it with barbed wire. That was soon festooned with angry placards. Inside, opposition politicians sought to disrupt parliamentary business: they seized the podium, and brawls broke out. In Taiwan, as everywhere else, reining in expensive pensions is not easy. But Tsai Ing-wen, the president, seems determined to press on. The current system, she said last month, is on “the brink of bankruptcy”.
The government’s liabilities have swelled to almost NT$18trn ($597bn), nine times its total annual expenditures. That is divided among funds for different professions, in which contributions from current workers help to finance payments to pensioners. The fund for civil servants is projected to go bust by 2031; the one for teachers by 2030; the one for private-sector workers in 2027; and the one for the armed forces in 2020.
The root of the crisis lies in Taiwan’s rapidly declining birth rate and growing longevity, which means that there are fewer workers to support the swelling ranks of the old. In 2015 Taiwanese women were projected to have just 1.2 children on average over the course of their lives, even as life expectancy passed 80 for the first time. A government study found that in 1996 there were nine working people for each pensioner. The ratio fell to six to one in 2015 and will be less than three to one by 2031. Sluggish economic growth and stagnant government revenues provide no way out.
Politics has made matters worse. When the Kuomintang party (KMT) fled to Taiwan in 1949, having lost China’s civil war, it filled the army and public service with mainlanders and provided them with generous pensions. Native Taiwanese worked mainly in the private sector. Taiwan began to democratise in 1987, but the KMT continued to dominate parliament until last year, thanks in part to strong support from the public sector, whose expensive pensions it continued to defend. Over 450,000 retired teachers, soldiers and bureaucrats receive an annual payment of 18% of the lump sum they built up in their pension account before 1995—a commitment that cost the government NT$78bn last year, or 4% of its spending. Benefits are not quite so generous for those who have retired more recently, but civil servants can still stop work with lavish benefits at 55.
Ms Tsai and her Democratic Progressive Party want to reduce the 18% payout to 6% over six years, subject to a minimum payment to protect poorer pensioners from poverty. They also want to cut monthly pension payments for other civil servants and teachers while raising the retirement age to 65. In addition, the president has pledged to inject an extra NT$20bn a year into the private-sector fund, which is much less generous. All this, the government reckons, will extend the life of Taiwan’s pension funds by just 10 to 15 years or so.
Lin Wan-i, the minister in charge of these reforms, says young people want even more sweeping changes. They worry that there will not be a pension for them by the time they retire. Moreover, they consider the huge payouts to the old unfair. Taiwanese workers earn about NT$39,500 a month on average. A typical monthly salary for a new university graduate is just NT$22,000. But retired high-school teachers receive a whopping average pension of NT$68,340 a month.
But pensioners see Ms Tsai’s plans as a breach of trust. More than 100,000 people demonstrated against the reforms last year. The most dogged protesters have set up a camp outside parliament. And there is the delicate matter of reforming military pensions at a time of heightened tensions with China. Ms Tsai has not yet announced her plans for that, but Mr Lin says any changes will be less drastic.
A poll by TVBS, a local broadcaster, found that 61% of Taiwanese supported pension reform in principle, though 46% were unhappy with the government’s handling of it. Ms Tsai can console herself with two thoughts. First, the fact that young and old alike are angry suggests she may be striking a fair compromise. Better still, the KMT is in too much disarray to take advantage of all the indignation.