Why it’s time for Taiwan to further pension reform
Incumbent Taiwan president Tsai Ing-wen made many proposals in her election manifesto. The one that most struck a chord with local voters was her vow to defend the island’s sovereignty at a time when Beijing is striking a more hostile posture.
In contrast, pension reform, another urgent topic, received barely a mention from Tsai.
Her reticence is understandable. Pension reform is never an easy topic to discuss, particularly in a fast-aging society like Taiwan. It’s all the more difficult to broach when the island’s older generation, upon whom Tsai also needed to gain votes, are arguably enjoying handsome retirement payouts at the expense of younger citizens.
Indeed, Tsai had her fingers burned two years ago after her administration tried reducing retirement payouts to military officers.
Traditionally officers paid 35% of their retirement contributions to the NT$591 billion ($19.75 billion) Public Service Pension Fund (PSPF), with the government covering the other 65%. But falling numbers of active military officers left the pay-as-you go system unsustainable. The BBC reported in April 2018 that funding for military officers could run dry by this year.
Tsai proposed reforming the system so that officers employed in the army for over 20 years received a payout of 55% of at least NT$38,990 ($1,304) per month, with a 2% increment for every additional year served. Military personnel strongly opposed the plan, causing major clashes between protesters and the police in front of the legislative building. Despite this, the reform came into effect on July 1 in 2018.
Tsai’s Democratic Progressive Party (DPP) suffered huge defeat in local elections a few months later. It lost mayoral elections in key cities including its stronghold of Kaohsiung, the southern port city where it had held power for more than 20 years. Some blamed the pension reform, and Tsai resigned as chairwoman of her party.
REFORM MUCH NEEDED
However, Tsai’s new election mandate offers a new chance to tackle pension reform. Doing so is important, as the pension costs will soon grow to bedevil Taiwan’s government if not dealt with.
Like many other economies in the world, Taiwan has a rapidly aging population. But the numbers can be a bit more alarming for the island.
In 2018, Taiwan’s Ministry of the Interior reported that 14% of the island’s population was over the age of 65. That rate is rapidly increasing and is expected to reach 20% or higher by 2026, which could make Taiwan the world’s first “super-aged society.” That is going to cause a more rapid drawdown of pension assets.
Signs of this pressure are already emerging. The Bureau of Labor Funds (BLF), the island’s main state pension provider, will see one of the six funds under its management run out of money by 2026, according to an actuarial report released early last year by the Bureau of Labor Insurance, a division of the Ministry of Labor.
The NT$740 billion ($24.72 billion) labour insurance fund, which accounted for about 17% of BLF's assets of NT$4.28 trillion at the end of November, will report its first negative fund balance by 2026, one year earlier than previously estimated.
Deputy Minister of Labor Shih Keh-her has pledged to fill a funding gap with an injection of NT$20 billion this year, after gaining the approval of the Executive Yuan (the executive branch of the government). Shih pledged that the government would bear the ultimate responsibility to pay for workers’ insurance.
The fund, which serves the insurance needs of the majority of the employees in Taiwan, has already been contentious. In 2018, military personnel arguing against reforms of their retirement benefits claimed that the labor insurance fund was the core problem in the island’s social security system and most in need of reform. However, the government has not yet dared touch it, probably due to the sheer breadth of people that it covers.
However, Taiwan's public pension system does need reform if it is to last. And the time for Tsai to do so is now, given that she garnered an unprecedented 8.17 million votes for her presidency. Her DPP also controls the legislative body following the election. This means she will receive less opposition when proposing and passing reform bills.
Moreover, Tsai’s victory demonstrates that Taiwan’s younger people in particular are concerned by external threats and believers in equality and fairness. Young and middle-aged citizens are also more likely to accept large pension reforms because, in the worst-case scenario, they may be otherwise required to pay more tax to cover rising payouts.
Despite this, pension reforms will not be easy. They are likely to provoke a new round of fierce debate, and even protests from elderly people. Nevertheless, Tsai should not shy away from trying to solve this problem if she wants to secure a more stable fiscal outlook for the government and the island's pension fund providers.
As Tsai said to her people in the winning speech: “I still have four more years, I’ll definitely leave a better country to you.”