Taiwan delays national pension scheme indefinitely
Taiwan's Finance Minister Hsu Jia-dong announced last week that the introduction of a national pension scheme would be indefinitely delayed, citing fears of creating a welfare-dependent mentality, and increasing tax burdens on the public.
The Council of Economic Planning Development (CEPD) tabled a report in the past fortnight to a cross-party committee vested with the task of selecting a model for the National Annuity Plan. Three members of the committee of six are from the ruling Democratic Progressive Party, two from Kuomintang (KMT) and one from New Party (NP). The committee was supposed to make a cross-party recommendation to the Legislative Yuan for passage and for the scheme to be implemented on the scheduled date of 1 July 2001.
But, according to the finance minister in a televised speech, one of the proposed models could encourage workers to count on the government for retirement support, while the other would increase the tax burden on the public at a time of financial difficulties.
The CEPD report lays out the details of two models for the committee to consider. One is an individual retirement account (IRA) based on workers' contributions; the other financed largely by an increase in sales tax.
Under the IRA scheme, the initial monthly payment retirees could receive is fixed at NT$7500 ($242), which is 50% of the average monthly expenses of an adult. Workers are required to contribute 10% of that amount each month of their working life, of which at least 2% is subsidized by the government. That 2% would then be put into a "public account" while the rest goes into the workers' own accounts. When the workers' accounts are depleted, their benefits would then be drawn from the public account. The scheme would cost NT$42 billion in the first year, plus levies from lotteries and proceeds from the sales of state assets.
The consumption tax-financed scheme also would cost the government NT$42 billion in the first year, but workers are required to make contributions to their own retirement. Instead the government would make up any shortfall through lottery levies and increasing the sales tax, which at present is 5%. The scheme proposes to raise the sales tax by 1%, collecting an estimated amount of NT$34.5 billion each year. The revenue from sales tax last year was NT$200 billion, and has been growing at around 7% each year since its introduction. Senior citizens 65 or above could receive NT$3000 under the tax-financed scheme on top of their existing retirement benefits.
The current system
While civil servants and the military are looked after by generous pension schemes, Taiwan's current retirement system for the private sector has long been criticized as confusing and complicated. Workers are in theory covered by two compulsory defined contribution schemes at present.
The first one, commonly referred to as "labour insurance", takes 6.5% of the workers' salary as contributions. On that amount, employers account for 70% of the contributions, the government 20% and workers 10%. To be able to participate in the scheme, however, the workers need to be with the same company for at least five years. But with an increasing number of workers switching jobs more often, there is a worry that many of them will not be able to accumulate adequate benefits for retirement.
While a contribution rate of 6.5% under the labour insurance scheme is low, it is only meant to supplement the benefits offered by another scheme that is also supposed to be compulsory. The Labour Standards Legislation (LSL) scheme requires all employers to contribute between 6% and 10% of an employee's salary for retirement. In reality only a small number of retirees can benefit from it. In 1998, for instance, only 13% of all retirees could receive benefits under LSL. There are two fatal problems with the scheme.
First, employees need to be with the same employer for at least 15 years before they are eligible for the benefits, a requirement that is likely to further reduce the number of qualified workers in the years to come. Second, as most employers are already contributing to their employees' retirement under the labour insurance scheme, many simply do not make contributions to LSL. The fine of NT$30,000 for breaching the law is considered to be a small price to pay compared to the size of the employee benefit they can avoid paying.
But don't workers complain and the authorities get tough about such blatant violations of the law? While on one hand not many workers stay long enough to be eligible for LSL, those who do, do not necessarily make enquiries about their pension. Politicians, on the other hand, seem to tolerate the situation because they believe employers already have a heavy burden with their labour insurance obligations.
Tangled political process
Despite repeated attempts to reform its pension system in the eight years since setting up a special committee to look at the issue, Taiwan has made little progress. For politicians, this time round is as much a matter of making the right decision as getting the right number of votes. Any pension model that may require voters to pay either in tax or through deductions from wages are likely to upset some quarters in the voting community. However, according to a memo of the cross-party committee meeting held this month, five out of the six members agreed a national pension scheme should be put in place by the end of next year, after the general election of the Legislative Yuan.