A new book calls on the Taiwanese government to undertake pension reform as warning signs indicate that Taiwan could face problems similar to those experienced by Greece
This article was first published online by Thinking Taiwan想想論壇(http://thinking-taiwan.com) on March 30, 2016.
In his latest book 《中華民國股份有限公司破產》(Taiwan Inc Bankruptcy), Hao Chung-jen (郝充仁), a professor at Tamkang University, takes a close look at the impact of what he describes as Taiwan’s ill-designed pensions system and the barriers that have hindered progress in pension reform.
The book emphasizes the urgency of pension system reform through a business metaphor: If the Taiwanese government were a company, you would be terrified to discover how little its earnings are. Hao is adamant that the pension system has serious flaws, but he believes that it can change.
The opening chapters provide a brief history of Taiwan’s pension system and analyze how demographic structure changes have affected that system. The section goes all the way back to 1949, when people from China poured into Taiwan and when the government decided to give outrageously high pensions to military personnel, civil servants and public teachers (軍公教) to compensate for the low wages at the time. Despite subsequent wage increases, the high benefits provided by the pension system remained in place, resulting in “fat paychecks” and high pensions.
And that is the heart of the problem and a liability for Taiwan, Hao says. Record-high replacement rates and the notorious 18 percent preferential interest rate for military personnel, civil servants and public teachers threaten the country’s economic stability, while low labor insurance and labor pensions leave a large segment of Taiwanese society behind.
Why hasn’t the government done anything to address this huge debt? Hao believes that one of the challenges is Taiwanese politics, whose idiosyncratic campaign culture has encouraged politicians to make big promises that they simply cannot keep.
It is estimated that the total hidden debt will reach NT$18 trillion in 30 years. Hao argues it is possible that the Taiwanese government could go into bankruptcy if we do not urgently start reforming the pension system. The obvious implication of a population that is getting a lot older without growing much is that, unless the retirement age changes, there will be fewer workers. To make matters worse, the shrinking workforce is already struggling with low wages.
In later chapters, the author urges comprehensive reform of the pension system. Hao believes that the pension system can become more sustainable while being more compassionate toward the various generations of people in Taiwan. A plausible alternative to the current system, he says, would be to follow the lead of countries like Germany, Japan and Sweden. Sweden’s “pay-as-you-go” (PAYG), which relies on a notional defined-contribution (NDC) model, could be one solution for Taiwan and restore financial sustainability. Hao says that Sweden’s experience with NDC shows that it can be helpful in swiftly responding to rising life expectancy by having the money directly contributed by people who are currently in the workforce.
Hao believes that the Taiwanese government should start reform by re-examining the existing pension system based on changes in the demographic structure, insurance payments, and total premiums paid (所繳納的保費與給付的總額), and make the necessary adjustments. The government should also make changes to the financial system and look for additional financial resources to ensure that the system, whatever form it eventually takes, is sustainable. Reasonable adjustments should also be made concerning the beneficiaries of insurance (領取給付的受益人) based on a reasonable income replacement rate, he says.
According to Hao, gradualism will be the key to successful pension reform, in particularly regarding changes and adjustments to the basic pension (基礎年金) and occupational pension (職業退休金).
Taiwan’s economy and workforce have changed. Its pension system needs to change, too. One of the most pressing domestic concerns for incoming president Tsai Ing-wen (蔡英文) will be to undo the damage that was done to the pension system over decades of mismanagement.
Taiwan Inc Bankruptcy is an approachable resource for readers who care about Taiwan’s pension reform and should appeal to professional researchers and the general educated public alike.
《中華民國股份有限公司破產》Taiwan Inc Bankruptcy
303 pp, Business Today, 2015
Yahsin Huang is a technology journalist based in Taipei who writes mostly for Make magazine (Taiwan), Event Platform, and TechLife.