20 February 2019
Police surround a protester during a rally against pension reform outside the parliament on Wednesday. Photo: AFP
Police surround a protester during a rally against pension reform outside the parliament on Wednesday. Photo: AFP

What HK can learn from Taiwan’s pension fund chaos

Taipei Mayor Ko Wen-je was among those assaulted by protesters outside the parliament on Wednesday.

The violent protest was triggered by President Tsai Ing-wen’s plan to reform Taiwan’s hemorrhaging pension system, which is expected to go bankrupt within three years due to excessively high benefits.

Concerned that their retirement income will be cut, a large number of retired civil servants, teachers and servicemen have tried to stop lawmakers from entering the legislative complex in central Taipei. Ko became a target probably due to his high-profile support for the reform.

Tsai has vowed to press ahead with the reform, saying she won’t tolerate violence.

Under the current system, civil servants, teachers and servicemen receive far more benefits than the average Taiwanese workers.

The former group get a monthly pension income equivalent to 85 to 95 percent of their final salaries, compared with around 40 to 50 percent for average retirees.

These public sector retirees are also entitled to a special savings rate of 18 percent interest for up to NT$2 million (US$65,888). The related interest expenditure amounts to more than NT$80 billion a year, which is also covered by the pension fund.

Such large payouts are no longer sustainable, thus the need for a more sustainable pension system.

Under-funded liabilities of public and labor sector pensions were estimated to have hit a record NT$18 trillion in 2016. And the pension fund is likely to go bankrupt as early as 2020.

That’s why Tsai had listed pension fund reform as one of her major tasks during the election campaign.

She vowed to slash preferential treatment for public sector retirees, such as scrapping the 18 percent interest for their savings and cutting the payouts to retired civil servants to 65 percent of their final salaries.

The society is now divided into three camps based on their stance on the pension fund issue.

The first camp, led by the Pension Reform Oversight Alliance which organized the protest, is composed of public sector retirees. They are strongly against any reform.

The second camp comprises existing public sector workers. They are worried that if the pension fund goes bankrupt, their benefits will be hit hard.

While supporting reform, they are against changing the pension plan for existing public servants and believe that new rules should only be applied to newcomers.

Still, such half-hearted reform would only extend the solvency of the pension fund by around 15 years.

The third camp is made up of non-public retirees and young people. They fully support Tsai’s plan to overhaul the existing system.

Most college graduates on the island only get a starting salary of around NT$22,000. By contrast, a large number of public sector retirees receive a monthly pension of NT$70,000. No wonder youngsters are eager to see changes.

As Hong Kong is also trying to formulate a proper retirement benefits plan, Taiwan’s pension woes should serve as a lesson on how it should not be done.

This article appeared in the Hong Kong Economic Journal on April 20

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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