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Taiwan's Military May Be First Casualty in Pension Crisis


Demonstrators protest against the reforming of Taiwan's deficit-ridden pension programs, in Taipei, Taiwan December 31, 2016. | PHOTO: Reuters/Sun Su

 


 January 5th, 2017  |  09:12 AM  |   901 views

TAIPEI/HONG KONG

 

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

 

The government says an urgent overhaul of the pension system is needed as large payouts are no longer sustainable for the export-reliant economy, with contributions crimped by slower economic growth since the 1990s and a rapidly aging population.

 

Some 120,000 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 had 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."

 

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

 

The unease over pension reforms cuts across other sectors. Under-funded liabilities of public and labor sector pensions were expected to hit a record T$18 trillion ($570 billion) in 2016, nine times the government's annual budget expenditure and a big jump from T$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 T$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 aging 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 President Tsai, whose popularity has hit an all-time low since taking office last May. She says reforms are "urgent" given 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 demoralized.

 

"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 T$49,379 on average, and civil servants T$56,383 - around 75-85 percent of last-drawn salaries and about twice the starting pay of new graduates.    

 

 

 

AGING POPULATION  

 

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 T$5.67 trillion over the last 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 aging 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 Bank of America Merrill Lynch in Hong Kong.

 

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

 

Taiwan's aging demographic and a low birth rate have resulted in higher debt for these funds - at 53 percent of GDP. 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 percent or allowing more exemptions when calculating the limit," Man said.

 

S&P Global Rating's aging studies show most sovereign ratings will go down if governments don't enact reforms to pension and healthcare 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."

 

(Editing by Jacqueline Wong)

 


 

Source:
courtesy of REUTERS

by Faith Hung and Umesh Desai

 

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