When President Tsai Ing-wen (蔡英文) delivered her inauguration speech after being sworn in as Taiwan’s first female president on May 20 last year, she pledged to build a better nation for younger generations. The first and foremost task in fulfilling that goal, she said, is to reform the nation’s cash-trapped pension system that would otherwise go bankrupt within a decade. Stacy Hsu looks into the history of and the many challenges associated with this endeavor.

 

Before the Democratic Progressive Party (DPP)-dominated legislature passed the pension reform bills targeting retired civil servants and public-school teachers amid fierce protests in late June, the country’s pension system was a “political time-bomb” that many leaders before Tsai had tried — and failed — to defuse.

At the center of the problem are two notorious absurdities in the pension schemes of retired military personnel, civil servants and public-school teachers: the so-called 18% preferential interest rate and abnormally high income replacement ratios.

The preferential interest rate can be dated back to as early as 1960, when Taiwan was under authoritarian one-party rule. In light of inflation and the relatively low salary received by public servants back in the day, the Chinese Nationalist Party (KMT) regime issued a series of administrative orders to offer a preferential saving rate on civil servants’ pension payments in a bid to ensure their financial security after retirement.

According to the Examination Yuan, the administrative body in charge of managing public servants, the saving rate has undergone several adjustments since its introduction, from the initial 21.6% to 14.25% in 1970, 16.7% in 1979 (with the rate floor at 14.25%), and then to 18% (also the rate floor) in 1983.

The preferential interest rate was scrapped following the implementation of a new pension system in 1995, which increased civil servants’ pension benefits by allocating part of their monthly income to the pension fund, rather than relying on the government as the sole contributor.

However, it did not quash the controversy surrounding it, as public servants who were hired before 1995 were still entitled to the saving rate after retirement. (The amount of a retiree’s pension payment that is eligible for the interest rate depends on a public servant’s pre-retirement income and number of years of service prior to 1995.)

The meeting minutes of the Presidential Office’s Pension Reform Committee show that as of June last year, approximately NT$462 billion (US$15 billion) in pension payments from about 457,000 public-sector retirees were stored in bank accounts eligible for the 18% interest rating, putting a NT$82 billion dent in government coffers each year.

The committee’s deputy convener, Lin Wan-i (林萬億), estimated that the interest rate would not really become history until 2054.

Though the saving rate had its historical necessity, today it is mostly seen as a remnant of Taiwan’s authoritarian era, one of the roots of social injustice, and a form of political payout by the KMT to cement support among the nation’s civil servants, which has in turn created an uneven playing field for political parties.

Due to the preferential interest rate and/or public-sector employees’ ostensibly “unfair” pension calculation formula, some of their actual income replacement ratios (the percentage of one’s pre-retirement income) could be over 100%. This means they could earn even more in retirement than they did when they were on the workforce.

In 2006, despite leading a minority government, president Chen Shui-bian (陳水扁) of the DPP sought to reform the preferential interest rate. However, instead of gradually phasing out the rate, he only managed to cut down on the amount of pension payment from which a retiree could earn the interest rate by putting a cap on their income replacement ratio.

Chen’s successor, Ma Ying-jeou (馬英九) of the KMT, also made pension reform one of his policy priorities, describing the problem as so dire “people will regret it tomorrow if we do not reform it today.”

The Ma administration established a pension reform task force to solicit public opinions in 2009 before rolling out a draft plan in 2013. Despite the efforts, the plan was stalled at the KMT-dominated legislature at the time — allegedly due to electoral concerns and overwhelming criticism of what president Ma called a “painful decision” to cut year-end bonuses for public-sector retirees in 2012.

Failed efforts by her predecessors and fears of further alienating the DPP among public servants should have deterred President Tsai from making another attempt. Instead, she put pension reform at the forefront of her policies and joined hands with DPP lawmakers in ramming pension reform bills that many deem drastic through the legislature.

Under the bills passed so far, the 18% preferential interest rate will be reduced to zero two years after the bills’ promulgation scheduled for July 2018.

In addition, civil servants and public-school teachers (the draft bill for military personnel is yet to be drawn up) will see their income replacement ratio reduced to 60% within 10 years and ultimately be required to calculate their pension payment based on their average monthly salary in the final 15 years of employment, rather than their last month of service as currently stipulated.

Tsai’s reform success has reflected in her approval ratings. According to a survey by the TVBS poll center on July 12, the president’s support rate has climbed to 29%, from 21% in June.

Such efforts, however, are not without their costs. President Tsai has been shadowed by anti-reform protesters, some of whom have threatened to use violence or to disrupt events such as state visits by foreign presidents or the upcoming 2017 Universiade in Taipei. Two pan-blue parties, the KMT and its spin-off, the People First Party, are mulling filing a request for a constitutional interpretation on pension reform legislation.

Just as in other countries, pension reform is almost always a magnet of unpopularity and fierce protests. A good leader will know when to overlook temporary noises and focus on the long-term good.