PENSION FUNDS
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Taiwan

Taiwan’s military may be first casualty in pensions crisis

Island’s government says overhaul of pension system needed as large payouts no longer sustainable as export-reliant economy slows and population ages

PUBLISHED : Thursday, 05 January, 2017, 11:40am
UPDATED : Thursday, 05 January, 2017, 11:46am

Taiwan’s military pension fund may be in default by 2020 after years of widening deficits, raising alarm about the island’s defence stability when tensions are heating up with mainland China.

The island’s government said an urgent overhaul of the pension system was needed as large payouts were no longer sustainable for the export-reliant economy, with contributions crimped by slower economic growth since the 1990s and a rapidly ageing population.

Honeymoon’s over for Taiwan’s Tsai Ing-wen as policy fights slow reform

About 120,000 people on military pension benefits and another 200,000 in the civil service are nervous about pension reform, a priority of President Tsai Ing-wen.

A restructured scheme could result in having to wait longer to retire as well as smaller pension payments, among other changes.

“The biggest problem we are facing with the reform is fear. It is making everyone anxious and uneasy,” said Hu Chu-sheng, a retired former lieutenant general who served in the army for 40 years.

“When soldiers cannot focus on their duty, it weakens the effectiveness of Taiwan’s military forces,” Hu said.

“It would then be easy for China to take Taiwan without even getting blood on their knives.”

Beijing regards Taiwan as a breakaway province that should be reunited with the mainland, by force if necessary.

Why is the popularity of Taiwan’s Tsai Ing-wen plummeting?

The unease over pension reforms cuts across other sectors. Under-funded liabilities of public and labour sector pensions were expected to hit a record NT$18 trillion (US$570 billion) in 2016, nine times the government’s annual budget expenditure and a big jump from NT$12 trillion a decade ago.

“If we cannot have stability over the next 20 or 30 years, it is unavoidable that it will trigger a financial crisis for the government,” said director Lu Ming-tai of the retirement and survivor relief department of the Civil Service Ministry, which manages more than NT$560 billion in one of the government’s public sector pensions.

The surge in the under-funded liabilities since 2008 has raised the urgency of pension reform.

“Taiwan and the other ‘Little Dragon’ economies are the fastest ageing Asian economies after Japan,” said S&P Global Ratings analyst Kim Eng Tan.

“Taiwan’s demographic profile means that contributions to the public servants’ pension funds are already below benefits paid to retired members.”

Successfully reforming the pension system will be crucial for Tsai, whose popularity has hit an all-time low since taking office last May.

She has said reforms are “urgent” given the limited national and social resources and wants to see pension reform bills passed by the legislature this spring.

As doubts arise over the government’s ability to fund pension and health insurance, Taiwan’s youth feel increasingly demoralised.

“If the pension system is not reformed soon, young people see no hope for their future,” said Chu ying-ju, 23, a graduate student and member of an advocacy group on pension reform.

Military staff draw monthly pensions of NT$49,379 on average, and civil servants NT$56,383 – around 75-85 per cent of last-drawn salaries and about twice the starting pay of new graduates.

We expect the burden of an ageing society to intensify over the next two years in Taiwan and Korea as their working populations shrink for the first time in modern history
Ronald Man, Bank of America Merrill Lynch

Tsai’s determination to push on with reforms, where former President Ma Ying-jeou had failed, has angered hundreds of thousands of public sector employees who demonstrated in Taipei in September, demanding the government protect their interests.

“Pension reform is the toughest job on the domestic agenda,” said Lin Wan-yi, deputy chief of the National Pension Reform Committee.

Government debt has surged tenfold to NT$5.67 trillion over the past 23 years while the working population has shrunk.

And time is not on the government’s side. Pensions for civil servants could default by 2030, teachers in 2031 and other workers in 2048, government data shows.

“We expect the burden of an ageing society to intensify over the next two years in Taiwan and Korea as their working populations shrink for the first time in modern history,” said Ronald Man, of the Bank of America Merrill Lynch in Hong Kong.

There were 13 working people per retiree in 1985, declining to six in 2015, and there will be less than two by 2050.

Taiwan’s ageing demographic and a low birth rate have resulted in higher debt for these funds – at 53 per cent of gross domestic product. That figure will likely climb as funds hunt for yield overseas because domestic rates are low.

“Officials could tackle this problem for pension funds and insurance companies in Taiwan by raising the overseas investment limit from 45 per cent or allowing more exemptions when calculating the limit,” Man said.

S&P Global Rating’s ageing studies show most sovereign ratings will go down if governments do not enact reforms to pension and health care financing schemes.

“In the near future, the sum of new contributions plus existing fund assets will not be able to meet benefit payments,” said S&P’s Tan, adding that Taiwan’s National Health Insurance was potentially a bigger concern.

“Like pensions, its burden will grow as Taiwanese age. And it covers a much bigger part of the population, including some who live abroad.”