Saturday, February 02, 2013

Pension Contention

The island of contention is in tension over public pensions with protests, criticisms, public discussions, and the like. Lots of stuff for the media to print. This week the military even slyly alluded to a legislator's affair in order to shut him up after he criticized retired military for double-dipping even though they have relatively good pensions. Yes, you know when spokesmen for the ROC's stuffy military are making veiled references to sex in KTVs, there's something serious going down.

This week President Ma released his plans to "reform" the pension system to prevent bankruptcy. The government claims that the system will go bankrupt sometime after 2019 if nothing is done about it. The president proposed:
  1. When the years of service and the age of an individual add up to 90, they can retire from the civil service. For example, if you are 60 and have 30 years of service, you can retire. The current system demands only 85. 
  2. Police and firefighters excluded from the new system, while everyone else gets a 10 year grace period.
  3. Retirement income limited to 80% of their final income. 
  4. Lowering the 18% preferential interest rate enjoyed by certain individuals to 9% in a few years. Another article stated:
    Under the plans, the 18 percent preferential savings rate would be cut to 12 percent in 2016, with a decrease of 1 percentage point every year afterward until 2020, when the rate is to be replaced with a floating interest rate.

    The floating interest rate is to be calculated by adding 7 percent to two-year certificate of deposit (CD) rates at the Bank of Taiwan, with a ceiling of 9 percent.
  5. A three-tier pension plan for civil servants.
The DPP criticized the plan as "chaotic" and laughed at Ma for piously giving up his 18%. In fact, if you peer closely, the KMT Administration reforms addressed KMT core constituencies. The Labor Insurance system is also being changed, after boneheaded investments cost it millions (here). The DPP has its own plan, raising the retirement age for civil service workers all the way to 65 by.... 2027. The DPP also wants to see the government pensions come into line with private ones. An article a couple of years ago in the Taipei Times observed:
Under Taiwan’s system, military personnel, public servants and teachers only have to work for 25 years and reach the age of 50 before they can retire. Because 25 plus 50 equals 75, some call it the “75 system.” These retirees draw a monthly pension equal to 100 percent of their salary, and they receive it for the rest of their lives. This may well be the most generous retirement pension scheme in the history of the world — even the Greeks must be envious. Taiwan’s military personnel, civil servants and teachers pay just 7 percent of their salaries for labor insurance payments, about the same as Greeks pay, and much less than the 10 percent paid by Germans.
Since government workers in the martial law era were more or less required to be KMT members and for many years after were heavily KMT members, the large civil service pensions represent a transfer of wealth from the productive private sector, predominantly Taiwanese, to the KMT and its mainlander dependents. Taiwan remains, in many ways, a colony.

Speaking of colonization, the 18% interest rate has long been a bone of contention. I posted on it a couple of years ago:
The problem is that the 18% interest is paid jointly, half from the central bank and half from the counties. The counties must raise the money on their own. These funds thus represent an additional tax on the local areas, which must be paid out of funds that could have gone for roads, schools, or parks. It goes without saying that most of the county governments in Taiwan are flat broke. It is thus not a coincidence that the indebted areas, Tainan, Pingtung, and Yunlin, are all hotbeds of Taiwan nationalism.
Say General Chen retires from the military and moves to Pingtung. Half of the 18% interest on his retirement funds come from the central bank. The other half Pingtung country has to raise on its own -- by borrowing, inevitably from the central bank. This means that the taxpayers of Pingtung county pay out the nose to General Chen and also to the bank in the form of interest on the debt, reducing county living standards. Thus lowering this rate is a highly popular move.

In addition to their origin in the KMT's wealth extraction schemes, Taiwan's pension problems also have another origin: democratization, as this paper discusses. The DPP and its tangwai predecessors had pushed for a welfare system and a national health insurance system even during the martial law era. In the early 1990s the DPP captured local government positions in part by offering voters subsidies for the aged. However, these were not tied to increased taxes. Inevitably, the money vaults ran dry in a couple of years. These DPP-run local governments then requested bailouts from the central government, run by the KMT, which naturally refused. Since then subsidy offerings have gradually become staples of local political campaigns. By mid-1990s the KMT had awakened to the fact that pensions and subsidies were a good way to buy votes with taxpayer money and to retain their seats. In 1993 the KMT proposed a comprehensive pension scheme for the elderly, and in 1995 the two parties cooperated on an agricultural pension system, which was wisely funded --hard to believe that you can use the word "wise" to describe our legislature -- by a general taxation. Things took off from there....

In all the discussion about pensions, it is wise not to lose sight of some salient facts. This government has done little to address the fundamental and growing income inequality in Taiwan. Part of the reason so many government schemes are underfunded is that Taiwan's wealthy pay relatively low taxes. Thus, the discussion about pension "reform" and "shared sacrifice" simply means that the sacrifice will be meted out among hoi polloi, to be shared among them and not the wealthy. Yet another fundamental fact: Taiwan's hidebound attitudes toward immigration, naturalization, and citizenship mean that there is not a constant infusion of new blood to help propel the economy forward and to support our rapidly aging population. Finally, the island's economic situation has to be addressed in ways that make it more attractive for locals to raise families; no one can have children when housing is skyrocketing in price and incomes are stagnant. Taiwan needs to make broader, deeper changes.
Daily Links:
  • Top Five Taiwan Movies
  • Drew's staggering, awesome ride up the Wu-Ba Highway.
  • US, Taiwan agree to resume TIFA talks on a trade agreement. Now counting down 5...4...3... until some new issue regrettably emerges to [SHOCKER] stop the trade talks. Ractopork? Big Pharma? So many to choose from.....
  • AIT head Raymond Burghardt comes to Taipei to discuss "security issues." I bet someone got an earful about the Senkakus. Burghardt said that the US was committed to beefing up Taiwan's security.
  • Economic growth up Y-O-Y in the final quarter of 2012
  • Taiwan nearing FTA with Singapore.
  • South China Morning Post: Jiang appointment as Premier may revive Ma's low popularity. The government denies this is the case and its sticking to its story that it was Chen's health. However, the major media are all reporting it as a move to shore up Ma's popularity. The SCMP article has Jiang wrongly described. He was not "the island's research director" but director of the RDEC, the Research, Development, and Evaluation Commission. Its purpose is implementation and evaluation of policy and its head is equivalent to a cabinet minister; it is the most influential agency you never heard of. In the ROC system the central, provincial, and municipal governments all have their own RDECs. Head of the central government RDEC, a position that gives wide familiarity with government policy, was a position also held by Ma Ying-jeou before he held a cabinet position. Will Jiang follow the same path to power?
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