A Critical View of the National Pension Act Amendment Bill

- 2004.6.2. Bill No. 170010 Proposed by the Government: Partial Amendment to the National Pension Act -

1. Main Points of the Bill to Amend the National Pension Act Submitted to the 17th National Assembly

First, as a measure for fiscal stabilization, the pension benefit level will be reduced from the current 60% of average income to 50% by 2008, and the contribution rate will be increased from the current 9% to 15.9% by 2030.

Second, a National Pension Policy Council will be established as a means of coordinating the National Pension with other pension schemes such as the Government Employees Pension.

Third, in order to respond to the rapid increase in the size of the fund and changes in the financial environment, the National Pension Fund Management Committee will be made permanent.

There are various other amended provisions, but these are the main points.

2. Problems with the Current National Pension Act

The amendment bill submitted to the 17th National Assembly ignores the need to improve the problems that have emerged under the current National Pension Act. When a law is amended, the meaningful approach is to analyze the problems arising from its enforcement and to improve it in a purposive way so that as many citizens as possible can form a consensus in favor of and support the revised law. But this amendment neglects improvements to those problems and focuses solely on increasing contributions, while misleadingly presenting itself as a measure only to prevent fund depletion. To revise the law properly, the primary focus must be on identifying what is wrong with the current National Pension Act.

The problems with the current National Pension Act that have been discussed so far are as follows.

First, the provisions defining the concept of income for individually insured persons are themselves unclear, so premiums are being imposed based on rough estimates, industry averages, or data such as property holdings, and since income can only be calculated on the premise of a given period but no such period is specified, reporting is effectively impossible.

Second, contributions are being forcibly collected indiscriminately even from those whose income is below the minimum cost of living.

Third, while the fiscal deficits of other pension schemes such as the Government Employees Pension, the Military Pension, and the Private School Teachers’ Pension are growing ever larger, thereby increasing the burden on the public, these fiscal problems are ignored, and only the National Pension is being “reformed” through reduced benefits and increased contributions.

Fourth, many provisions contain unconstitutional elements from a constitutional perspective, including possible sex discrimination, blanket delegation, and lack of clarity in legal provisions.

3. Criticism of the Amendment and Alternatives

A. Contribution increases must be assessed in an integrated manner with other taxes so as not to undermine the functioning of the market economy.

Although the National Pension is social insurance, money that the state compulsorily collects while exercising an income redistribution function may be viewed as having “the character of taxation,” and some even call it a quasi-tax. In the United States, OASDI corresponds to our National Pension Act, and compulsory payments including it are collectively referred to as Social Insurance Tax or Social Security Tax and are regulated in an integrated manner from the perspective of taxation.

In Korea, however, social insurance such as the National Pension and health insurance is handled by the Ministry of Health and Welfare, while direct taxes such as income tax and corporate tax are handled by the Ministry of Finance and Economy and others, creating a bifurcated system that makes integrated understanding difficult. Citizens are forcibly deprived of part of their income under the logic of social insurance and, at the same time, another part under the logic of taxation, suffering under double and triple layers of harsh burdens. To remedy this, it is necessary to understand in an integrated manner all monies compulsorily collected by the state, local governments, or public corporations pursuant to law—including national taxes, local taxes, social security taxes, and various charges—and, to the extent possible, reduce the number of tax items and unify the collecting authority under the National Tax Service or the like in order to improve efficiency.

If contributions are raised to a flat rate of 15.9% as proposed in the amendment, while income tax has various deduction mechanisms in place, the National Pension has no such safeguards whatsoever, and most subscribers will end up being compelled to bear a National Pension burden far heavier than their income tax. Even by simply adding together the rates under current laws and the proposed amendment, the top rate of income tax is 39.6% (including resident tax), health insurance is 8%, and the National Pension is 15.9%; thus, even excluding indirect taxes and other quasi-taxes, the result is that 63.5% of income would be collected as direct taxes.

Germany’s Federal Constitutional Court has ruled that in a liberal democratic state under a market economy system, collecting taxes exceeding 50% of income is unconstitutional. Even without citing such precedent, if the state or public corporations collect 63.5% of income, no matter how high the taxpayer’s income may be, the taxpayer will lose the will to work, distrust in the market economy and the social system will grow, and the resulting macroeconomic effect will be to increase the excess burden on the overall economic system, reduce the efficiency of the market economy, obstruct economic growth, and directly contribute to leveling Korea downward—just as history shows that socialist systems with state-led planned economies lost competitiveness in the international community and saw their economies deteriorate.

Therefore, any increase in contributions must be determined in relation to other taxes, and if an increase is unavoidable to prevent fiscal depletion, then measures should be sought such as reducing income tax in exchange for increasing National Pension contributions, so as at least not to destroy the functioning of the market economy.

The term “national burden ratio” is used as the standard for comparing tax burdens, including social security taxes, across countries. Even at present (as of 2002), Japan stands at 18.3%, the United States at 24.7%, and Korea at around 28%, meaning Korea has already surpassed the United States and Japan. Although Korea’s current level is numerically lower than that of Sweden and France, European capitalist countries with a stronger socialist orientation, considering that Korea’s economic growth model and social system have mainly imitated and adapted those of Japan and the United States, it seems desirable for Korea’s economic growth model to move in the direction of lowering the tax burden, strengthening economic efficiency, and enhancing international competitiveness as much as possible through private-sector autonomy. In addition, when comparing the national burden ratio, one cannot necessarily say that Korea is “low burden” compared with European-style socialist countries, considering Korea’s relatively large underground economy among OECD countries, the low rate of income capture for the self-employed, and the high corruption index. This is why future policy must aim at enhancing economic transparency and pursuing large-scale tax cuts.

Furthermore, if the National Pension fund were to accumulate to around 1,700 trillion won, it would become so enormous through stock investment that it could effectively dominate all companies. At the same time, this could bring about serious economic contraction in the private sector. It is worth noting that many countries do not over-accumulate pension funds but instead operate them on a pay-as-you-go basis. The reason why the U.S. federal government prohibits stock investment with pension finances should be seriously considered.

B. The provisions on “income” and “reporting” must be clarified.

In the case of individually insured persons, the National Pension Service imposes contributions based on the income they report, but under the current National Pension Act, the provisions themselves are unclear and irrational as to what “income” means and by what procedure “reporting” is to be made.

1) Concerning the provisions on “income”

Article 3, subparagraph 3 of the current National Pension Act provides that “income means revenue obtained during a certain period from the provision of labor, business, operation of assets, etc.” Based on the income so reported, the National Pension Service determines the standard monthly income amount (Article 3, subparagraph 5 of the National Pension Act) and collects contributions by multiplying that standard monthly income amount by a fixed rate (Article 75 of the National Pension Act). The concept of “income” that determines contributions violates the constitutional principle prohibiting blanket delegation and the principle of clarity.

Contributions are forcibly collected by the National Pension Service from subscribers, and the basic pension amount among benefits (Article 47 of the National Pension Act) is calculated based on the subscriber’s average monthly income and paid from a common pool shared by all subscribers, giving our National Pension an income redistribution character. Therefore, if such contributions are to be forcibly collected, the standards by which they are determined must be clear in order to protect citizens’ property rights. Yet the concept of income itself is extremely unclear.

To be sure, Article 3 of the Enforcement Decree provides a rough standard regarding the scope of income, but there is no legal standard at all as to whether income is the same concept as income under the tax laws—namely, the enumerated concept of income under the Income Tax Act—or whether it is a comprehensive or economic concept of income. In practice, contributions are imposed based on presumed income, but the standards for calculating that presumed income are themselves unreasonable, making the provision unconstitutional.

In other words, Article 3, subparagraph 3 of the National Pension Act defines income as “revenue obtained from the provision of labor, business, operation of assets, etc.,” while Article 3, paragraph 2, subparagraph 5 of the Enforcement Decree merely states: “business income: income obtained from wholesale, retail, manufacturing, and other businesses.” But from this provision alone, it is impossible to know, in the case of individually insured persons, what the scope of income earned from business is or what the scope of revenue obtained from the operation of assets and the like is.

The National Pension Act’s concept of “income” does nothing to resolve the following problems.

First, if an individually insured person buys real estate for 100 million won and sells it for 200 million won, generating a capital gain of 100 million won, should that 100 million won gain be added to income under the National Pension Act?

Second, the National Pension Service currently calculates presumed income for individually insured persons based on their jeonse deposits, automobiles, real estate, and so forth. What is the legal basis for this?

Third, if an individually insured person earns monthly rental income of 5 million won from real estate leasing, should that be added to income under the National Pension Act?

Fourth, if an individually insured person earns 50 million won per year in interest income and 50 million won per year in stock dividend income, should those amounts be added to income under the National Pension Act?

Fifth, if an individually insured person invests in stocks and realizes a stock transfer gain of 100 million won in that year, is that income added to income under the National Pension Act?

Sixth, if an individually insured person authors a book and receives royalty income from the work, can that income be added to income under the National Pension Act?

Seventh, can revenue earned through the use of gambling devices or places such as slot machines and casinos be added to income under the National Pension Act?

Eighth, if an individually insured person gives lectures to an unspecified number of people and receives lecture fees, should that revenue be added to income under the National Pension Act?

Ninth, if an individually insured person operates an advertising business and uses a vehicle both for family outings and for commuting to and from work, can depreciation and fuel costs for that vehicle be deducted as business expenses?

Tenth, if an individually insured person is enrolled in private insurance and receives monthly pension income of 500,000 won, should that be added to income under the National Pension Act?

Eleventh, if an individually insured person earned 20 million won in pretax business income in 2003, paid 4 million won in taxes, and thus had 16 million won in after-tax income remaining, what is the basis for calculating income under the National Pension Act: 20 million won per year or 16 million won per year? On what grounds is that calculation made?

Beyond the problems listed above, the National Pension Act offers no standards whatsoever for the countless specific situations that arise. The reason is that the income provision in Article 3, paragraph 3 of the National Pension Act does not concretely define its scope. Such a provision violates the constitutional principle of clarity and the principle prohibiting blanket delegation.

An easy way to solve these problems would be for the National Pension Act to fundamentally adopt the provisions of the Income Tax Act and, additionally, because the National Pension has a strong savings-for-the-future character, to allow deductions not only under the income calculation rules of the Income Tax Act but also for currently unavoidable expenditures. That would solve the foregoing problems, yet the amendment says nothing about this.

2) Concerning the provisions on “reporting” of income

Article 19, paragraph 1 of the current National Pension Act addresses “reporting” of income by merely listing “the subscriber’s monthly income amount” alongside provisions on the reporting of acquisition and loss of subscriber status and suspension or closure of business, making it difficult to understand the legal nature of reporting one’s monthly income amount.

It is impossible to know whether the obligation to report monthly income amount is of the declaratory type under tax law, having self-effectuating legal force, or whether it is of the assessment type, in which the subscriber’s report merely assists the National Pension Service in determining income and the contribution becomes fixed only when the Service issues an assessment disposition.

Although Article 95 of the National Pension Act contains a prescription provision, it is impossible to know whether the statute of limitations begins when the monthly contribution notice reaches the subscriber or on the day after the payment deadline has passed. Moreover, where there is no report from the subscriber, or even where there is a report but the reported average monthly income is deemed inappropriate by the Service and contributions are imposed without the subscriber’s agreement, there is no provision at all regarding when the Service’s power to assess begins and when it expires—in other words, there is no provision on the exclusion period.

As for challenge procedures, Article 88 of the National Pension Act provides for an administrative appeal, but it is impossible to know whether the monthly contribution notice issued by the Service is an “assessment disposition” or a “collection disposition,” and it is also unclear whether an administrative lawsuit may be filed immediately against the monthly contribution assessment. The clarification of its legal nature is left entirely to academic and practical interpretation.

Article 19, paragraph 2 of the National Pension Act provides that, in the case of individually insured persons, “matters concerning income, etc.” shall be reported to the defendant, and Article 3, subparagraph 3 of the same Act provides that “income” means “revenue obtained during a certain period from the provision of labor, business, operation of assets, etc.” Article 3, paragraph 2 of the Enforcement Decree states that “the scope of income of individually insured persons shall be as follows,” listing only “1. agricultural income, 2. forestry income, 3. fishery income, 4. labor income, 5. business income.” As for the content of business income, it merely states, “income obtained from wholesale, retail, manufacturing, and other businesses.”

Article 3, subparagraph 3 of the National Pension Act refers to income “during a certain period,” but income is something that can be calculated only on the premise of a certain period (a flow), not at a specific point in time (a stock) like property or assets.

Nevertheless, Article 6, paragraph 2 of the Enforcement Decree provides that, in cases where a person first acquires individually insured status and begins paying pension contributions, or resumes payment after the exemption period under Article 77-2 of the Act (exception from contribution payment), the standard monthly income amount is determined by the income earned from the work engaged in “at the time of acquiring subscriber status” or “at the time of resuming payment.”

As seen above, income presupposes a certain period, yet Article 6, paragraph 2 of the Enforcement Decree requires reporting income “at the time of acquiring subscriber status” or “at the time of resuming payment,” that is, income at a specific point in time. The very concept of income at a specific point in time is contradictory and cannot exist. Even if one were to interpret it generously, for an individually insured person who becomes mandatorily covered at age 18, the income “at the time of turning 18,” or the income at the “starting point of resuming business” after a contribution exemption due to unemployment or no income, would necessarily always be zero.

In addition, because income is always changing, yesterday’s, today’s, and tomorrow’s income differ; last month’s, this month’s, and next month’s income differ; and last year’s, this year’s, and next year’s income differ. Therefore, averaging must necessarily be based on a period. Yet Article 7, paragraph 2, subparagraph 1 of the same Enforcement Decree provides that, for individually insured persons, if there is “no change in income,” the standard monthly income amount during the contribution period after acquiring subscriber status shall be “the subscriber’s standard monthly income amount at the time of acquiring subscriber status under Article 6, paragraph 2.” As seen above, income is always changing, yet there is no explanation whatsoever as to what “where there is no change in income” means, making this provision entirely meaningless. Furthermore, Article 7, paragraph 3, subparagraph 1 of the same article allows individually insured persons to apply for a change in standard monthly income amount due to “changes in business performance, etc.” But business performance is always changing, and there is no provision as to whether one must apply every day, every month, or every year.

In sum, although Article 3, subparagraph 3 of the National Pension Act defines “income” and Article 19, paragraph 2 of the same Act requires the reporting of matters concerning “income,” the system in practice is not structured at all in a way that makes it possible to report the standard monthly income amount based on “actual income.” The reason is that when the National Pension Act delegates matters to the Enforcement Decree, it does so by blanket delegation without setting concrete standards from which the outline of the delegation can be discerned. The administrative practice of the National Pension Service carried out through the Enforcement Decree and rules exploits this defective National Pension Act to make “arbitrary assessments” entirely unrelated to “actual income,” not as a tax but under the guise of “insurance.”

Even if the National Pension is “insurance” rather than a “tax,” “general constitutional standards such as the principle of clarity of law and the constitutional principle under Article 75 prohibiting blanket delegated legislation apply” (Constitutional Court decision 99Hun-Ma289, June 29, 2000, Constitutional Court Gazette No. 47, p. 102). Therefore, the provisions of the Act described above appear unconstitutional.

3) Solving the problem

The source of these problems lies in the fact that our pension system was built on the premise that the National Pension Service could reasonably and fairly identify the income of individually insured persons, that is, the self-employed. Employees of the Service have weak accounting knowledge for calculating income, and no rational program for calculating income has been established. In countries such as the United States and the United Kingdom, where social security taxes are imposed based on “income,” taxpayers report them together when they file income tax returns with the tax authority because of these very issues. In other words, because pension contributions are collected by the tax authority, irrational problems like ours do not arise. Korea’s National Pension Act was modeled on Japan’s former National Pension Act, but in Japan monthly contributions are fixed under a pay-as-you-go system rather than an accumulative system, unlike our method in which contributions vary according to income. Nonetheless, because collection work is handled by the National Pension Service, people are bearing contribution burdens imposed through an unfair, irrational, arbitrary, and oppressive collection-centered administration.

In Korea as well, a substantial part of these problems can be solved by transferring the collection function to the National Tax Service, and tax waste can also be reduced by lowering the operating costs of the National Pension Service.

C. The need for measures for those whose income is below the minimum cost of living

Article 3, paragraph 1, subparagraph 5 of the current National Pension Act provides: “The term ‘standard monthly income amount’ means an amount prescribed by Presidential Decree by grade, based on the subscriber’s monthly income amount, for the calculation of pension contributions and benefits.”

However, since provisions imposing monetary burdens on citizens should be established by a law passed by the National Assembly, the fact that the standard monthly income table and contribution amounts are effectively delegated to the Enforcement Decree raises the possibility of violating the principle of no taxation without law. Of course, our Constitutional Court has ruled that because the National Pension (social insurance) is “insurance” rather than a “tax,” this does not violate that principle (Constitutional Court decision 99Hun-Ma365, February 22, 2001). In the writer’s personal view, however, as in the United States mentioned above, social insurance should also be understood in a unified way as a social security tax from the perspective of taxation, and given that it is compulsorily collected, it is reasonable that the principle of no taxation without law should apply.

Even Japan’s Health Insurance Act inserts the “standard monthly remuneration table” directly into the statute passed by the legislature. Seen in that light, it is wrong to delegate to the Enforcement Decree provisions that impose a financial burden on the people.

Even if, under the present system, such matters are prescribed by the Enforcement Decree or Enforcement Rule, the law must clearly define the scope and make a specific delegation. In other words, a proviso should be inserted stating: “The lower limit of the standard monthly income amount by grade shall be the minimum cost of living for a four-person household as prescribed by the National Basic Livelihood Security Act, and the upper limit shall be the income corresponding to the top 30% of the previous year’s average monthly income amount of subscribers.” By including such a provision in the law, it is possible to avoid violating the constitutional principle against excessive restriction and the basic right to a humane standard of living.

To date, the biggest source of dissatisfaction among individually insured persons has been the indiscriminate compulsory collection of contributions even from those earning below the minimum cost of living. This dissatisfaction should be eliminated by clarifying the relevant provisions.

A counterargument is that if the law is amended in this way, the pension blind spot will widen, social insurance will become a system aimed more at the middle class and above rather than the low-income class, and this would run contrary to the original purpose of social insurance. But this issue is really one of how to guarantee the future of those who are unable to save for it. It should first be addressed through the current National Basic Livelihood Security Act and the support obligations under the Civil Act, and later, when Korea’s per capita income exceeds $20,000, by establishing a basic pension system for low-income people financed through general tax revenue such as national taxes.

D. Public pensions such as the Government Employees Pension and the National Pension must be unified.

The deficit of the Government Employees Pension is growing steadily. According to the fiscal projections of the Government Employees Pension Corporation, the expected deficit this year is 433 billion won, next year 634.6 billion won, and by 2007 1.3407 trillion won, making the fiscal burden truly astronomical. In addition, the benefit levels and eligibility conditions of the Government Employees Pension, the Military Pension, and the Private School Teachers’ Pension are far more generous than those of the National Pension. This problem arouses resentment among ordinary citizens and is a major source of distrust in the National Pension system. Measures to solve this should be reflected in the amendment.

First, the proposed “National Pension Policy Council” in the amendment should be renamed the “Public Pension Policy Council.” Second, a prohibitory provision should be newly established against covering deficits in each pension fund with general tax revenues. In other words, Government Employees Pension benefits must be paid strictly within the financial limits of the Government Employees Pension fund, Military Pension benefits within the financial limits of the Military Pension fund, and so on. If there is a shortfall, benefits should be reduced or borrowing undertaken; it should not be covered by taxes.

Even now, citizens are worried whether they will be able to get back even the principal amount of the contributions they have paid. That is because they do not trust a flawed state system. If fiscal deficits in public pensions such as those for civil servants continue to accumulate in this way, distrust in the current government will reach an extreme. These deficits must therefore be resolved.

In the long run, the Government Employees Pension, Military Pension, Private School Teachers’ Pension, and National Pension should be treated identically within the same financial pool, with the same contribution rates and the same benefit levels. The public cannot remain fools for civil servants forever. Civil servants are maintained by the taxes paid by the people. Nor can it be said that only civil servants serve the Republic of Korea. Anyone with even a slight understanding that the state itself can continue to exist only through the economic activity of the people would raise no objection to this policy direction.

When revising the National Pension Act this time, other public pension-related laws such as the Government Employees Pension Act and the Military Pension Act must also be amended fairly. If other public pensions are left untouched while sacrifice is demanded only of the people through the National Pension, such legislation can never be persuasive.

E. Provisions related to benefits

Although this amendment revises some benefit-related provisions, Article 66 of the National Pension Act defines the beneficiaries of the survivors’ pension only as the “wife,” and therefore there is no provision allowing the “husband” to receive the survivors’ pension for five years from the time entitlement arises. The provision should therefore be amended by changing “wife” to “spouse,” among other revisions. At present, the Constitution guarantees equality between men and women, and the Equal Employment Act prohibits sex discrimination, yet the National Pension Act discriminates in reverse against men. From a constitutional perspective, this is improper. Other provisions containing many unconstitutional elements must also be amended.

4. Conclusion

In addition to the issues listed above, countless more problems can be found. In the writer’s view, what is needed is not a partial revision of the National Pension Act but a full-scale revision of the current law. I sincerely hope for an in-depth review of various provisions within the bounds of respecting the constitutional values guaranteed by our Constitution—such as the market economy, equality in the burden of contributions, the principle of no taxation without law, and equality between the sexes—so that we may complete a hundred-year plan for our social security law.

Choi Won (Attorney, Chair of the Policy Committee, Korea Federation of Taxpayers)

---

Original title: 국민연금법 개정안에 대한 비판적 의견

Author: Won Choi

Date: 2004-08-17

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=bill&pn=4&idx=25832