SOUTH KOREA FACES PENSION REFORM

C O N F I D E N T I A L SEOUL 001091

SIPDIS

SIPDIS

STATE FOR E, EEB, AND EAP/K
TREASURY FOR OASIA/POGGI AND HAARSAAGER
NSC FOR TONG

E.O. 12958: DECL: 04/17/2017
TAGS: ECON EFIN ELAB KS PGOV SOCI
SUBJECT: SOUTH KOREA FACES PENSION REFORM

REF: (A) 05 SEOUL 3215 (B) 05 SEOUL 3368

Classified By: CHARGE D'AFFAIRES BILL STANTON FOR REASONS 1.4 B&D.

SUMMARY AND INTRODUCTION
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1. (SBU) Korea is on the verge of a gray transformation,
with its elderly moving from 9 percent to 38 percent of its
total population by 2050. This aging trend threatens to
explode the cost of Korea's National Pension System (NPS)
from 0.4 percent of GDP in 2005 to 7.3 percent of GDP by 2050
) and possibly up to a quarter of GDP by 2050, if serious
coverage gaps are eliminated and health care costs included.
While the ROKG launched a long-term plan, called "Vision
2030," last summer to begin thinking about Korea's aging
dilemma, they had hoped to defer specific proposals to tinker
with the NPS and fund its future shortfall until well after
the Presidential election of December 2007.


2. (C) Minister of Health and Welfare Rhyu Si-min changed
that 'wait-and-see' approach over the past few months. He
aggressively pushed a ruling Uri-party bill in the National
Assembly that would require people "to pay more, receive
less," while the opposition Grand National Party bill carved
out a "pay at current levels, receive less" position. Both
parties remain far apart, and the Health Minister recently
offered to resign over the impasse. President Roh is now
entering the fray and has authorized new Prime Minister Han
Duk-soo to craft a possible compromise. However, most
observers remain deeply skeptical that a deal can be struck
and predict pension reform will become another political
football as presidential campaigning heats up. END SUMMARY.

Worrying about Grandparents...
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3. (SBU) Korea faces an aging crisis, chiefly due to
declining fertility, improved health care, healthier life
styles, and limited immigration. These demographic trends
are highly likely to catapult Korea into the same league as
Japan, Italy, and Spain as one of the most aged countries in
the world. Moreover, as many Koreans contemplate their own
retirements, particularly the 'baby boom' wave following the
Korean War, they have begun to realize their growing
vulnerability will not be addressed by the NPS, established
in 1988 and still covering only 23 percent of adults over 60
years of age. It is glaringly obvious that the NPS, despite
its limited coverage, will deplete itself by 2047 unless
premiums into it are raised and payouts reduced, according to
most experts.

Vision 2030...
--------------

4. (SBU) Over the past two years, the ROKG has begun to
grapple with the aging challenge. In August 2006, it issued
a "five-year aging plan" that includes concrete measures,
from subsidies for companies that hire or retain older
workers to subsidies for families to help pay for children's
day care and education. At the same time, Deputy Prime
Minister (and Minister of Finance and Economy) Kwon O-kyu
unveiled the ROKG's "Vision 2030" blueprint chiefly to
address the needs of Korea's considerable baby-boom
generation that will begin retiring in 2015, possibly
contributing to labor shortages and spiraling health and
pension costs as early as 2030.

...makes people think.
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5. (C) In his public statements, DPM Kwon repeatedly
emphasized his Vision 2030 plan is aimed at "making people
think" about the long-term policies needed to deal with the
looming retirement crisis. It studiously avoided proposing
specific ways to cover the projected NPS shortfall. In an
October 2006 meeting with the Ambassador, Kwon stressed the
Roh administration had no plans to increase NPS pension
premiums or introduce new taxes to make up the NPS shortfall.
Indeed, Kwon opined the next elected government would be in
a better position to address such questions, probably by

2010. In the meantime, Kwon identified five priorities as
more feasible: R&D promotion, educational reform,
deregulation, market liberalization through ongoing KORUS-FTA
talks, and an expanded welfare system.

Health Minister Rhyu to the rescue...
--------------

6. (C) Minister of Health and Welfare Rhyu Si-min, a
confidante of President Roh and a possible Uri-party
presidential candidate, jettisoned Kwon's wait-and-see
approach almost as soon as it was unveiled. He used the
Vision 2030 platform of think-tanks to cobble together an
impressive consensus of experts on the deficit-ridden NPS,
spoke out about NPS shortcomings that resonate among a
populace increasingly concerned about their financial
security, and then aggressively pushed a specific NPS reform
proposal in the National Assembly.


7. (SBU) Health Minister Rhyu's bill -) sponsored by a
majority of the ruling Uri party ) called for lowering
pension payouts from 60 to 50 percent of salary levels by
2008, while raising subscriber contributions from 9 to 12.9
percent by 2018. On April 2, it was soundly defeated along
with a similar bill proposed by the opposition Grand National
Party that called for maintaining current premium levels but
lowering payouts from 60 to 50 percent by 2009 and to 40
percent by 2018.

...then tries to resign.
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8. (C) On April 6, Rhyu offered to resign as a result of
his failure to win legislative approval for his reform bill.
President Roh declined to accept it and is now girding up to
champion Rhyu's reform ideas, if not his specific proposal.
On April 10, President Roh tapped new Prime Minister Han
Duk-soo to take charge of legislative consultations and build
consensus for a compromise reform bill. Most observers note,
however, that even the ruling party coalition is deeply split
over any NPS reform and unlikely to reach a consensus. Just
as importantly, any proposal to cut back pension benefits in
an election year is widely viewed as political suicide,
"fanning yourself with a burning fan." Few expect a
breakthrough, as presidential campaigning intensifies.

Comment
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9. (C) The pension reform debate is likely to heat up but
not result in any quick legislative action except boosting
stipends for the elderly poor. Indeed, the Assembly passed
such a provision on April 2, but President Roh has threatened
to veto it. Rhyu called the partial measure a "major
disaster" in the absence of more comprehensive reform. The
elderly poverty rate is swelling in Korea -- now three times
that of the young, as extended family support networks cover
only 44 percent of the elderly as opposed to 81 percent in

1980. These trends -- coupled with the country's strong
sense of social solidarity and Confucian ethic of respect for
the aged ) back up the Assembly's consensus on increased
payouts for lower-income seniors. For now, then, pension
reform seems to entail only tinkering around the margins of
an increasingly shaky but politically untouchable pension
system.



10. (C) Despite its sensitivity, pension reform is clearly
on the scope of most Presidential candidates. Candidates
will not be able to wiggle out of it, if President Roh
follows through on his promise to give pension reform a high
priority. Moreover, Health Minister Rhyu's resignation
attempt probably signals his intent to announce his
presidential candidacy down the road and to use pension
reform as a rallying cry for his own brand of economic
activism and financial responsibility. The problem for Rhyu
may be that the electorate does not want to focus on, or
support scaled-back pension payouts at this time. End
comment.
STANTON