It took over a decade of planning to get the new pension plans up and running-but what significance do they hold for Taiwan? Can the government shoulder the fiscal burden?

Retired military personnel, government employees, and teachers long received generous monthly stipends equal to 70-90% of their salaries while others made do with a Labor Pension system that only provided at most a lump-sum payment of something over NT$1.9 million, and people not enrolled in any public pension plan (such as housewives, self-employed persons, or the unemployed) had no retirement benefits at all other than their own savings. Now that the revamped Labor Pension system and the new National Pension system have been launched, however, the vast majority of citizens will receive regular pension benefits as long as they live.

Monthly benefits for laborers

For those covered by the Labor Pension system, a key change is the switch from a lump-sum payment to regular annuities (those already covered before can choose whether to take a lump-sum payment or receive regular annuities). The monthly benefits are quite generous by any country's standard.

The revised Labor Pension system pays the same six benefits (maternity benefits, injury/illness benefits, etc.) available under the old system, but the lump-sum benefits formerly paid out upon death, disability, and old age have been converted to monthly annuities at an income replacement ratio of 1.55%, with old-age benefits available in principle from age 60 to anyone who has been enrolled in the plan for 15 years.

Labor Pension benefits are based on years of enrolment in the system. A person enrolled for 30 years and earning the maximum covered salary of NT$43,900 per month would receive about NT$20,000 per month. The longer one has been enrolled, the higher the benefits are, and there is no need to worry about dying before "getting your money's worth" because if the benefits received prior to death are less than what one would have received in a lump-sum payment, half-payments will continue going to the spouse and children.

In addition, under the new Labor Retirement system set out in the Labor Standards Act of 2005, employers must contribute 6% to individual retirement accounts (and employees have the option of making an additional employee contribution of up to 6%); upon reaching the age of 60, if the worker has been in the system for 15 years, the government pays out a monthly retirement pension, the amount determined by taking the amount of funds in the worker's retirement account and dividing by 22 (the average remaining life span for people of that age). By combining the Labor Pension system with the new Labor Retirement system, workers can receive benefits equal to about 70% of their former salaries.

Pensions for the less privileged

The National Pension system covers people from 25 to 65 years old who do not receive benefits as military personnel, government employees, or teachers. The system was originally intended to cover housewives, unemployed workers, and farmers, but the Legislative Yuan excluded the 800,000 receiving Farmers Insurance benefits from the National Pension system. That reduced to 3.5 million the number eligible for coverage under the National Pension system.

The National Pension is designed to ensure that everyone can afford the premium payments. In the first year of enrolment, everyone pays a premium of NT$674, based on a premium rate of 6.5% assessed against the lowest income bracket (NT$17,280 per month), with the covered person paying 60% of the premium. A person aged 65 enrolled for 40 years receives NT$8,986 per month, for an income replacement ratio of 1.3%. For those enrolled for less than 40 years, benefits are reduced proportionally. A 65-year-old housewife who enrolled at age 50 receives NT$4,700 per month, and will break even on her contributions by age 67, after which all benefits are pure profit.

According to the Council of Labor Affairs, all working people are required to enroll in the Labor Pension system, while non-working persons must transfer into the National Pension system. Once they reach retirement age they can apply separately for both types of benefits based on the combined length of enrolment in the two systems.

From the perspective of the general public, the best thing about the two systems is that enrolment time continues to accumulate even when a person switches between systems. For example, a retiree who was enrolled for less than 15 years in the Labor Pension system is only eligible to receive a single lump-sum benefit, but if combined enrolment time in the Labor Pension and National Pension systems amounts to 15 years, then he or she can begin from age 65 receiving regular annuities from both the Labor Pension and National Pension systems.

Three big concerns

Lin Wan-i, an associate professor in the Department of Social Work at National Taiwan University who has done a lot of research on social welfare policy and spent many years pressing hard for adoption of the Labor Pension and National Pension systems, acknowledges that implementation of the two systems represents a big step forward for senior citizens, but worries about potential systemic problems.

Firstly, the Labor Pension system pays better benefits than the National Pension system, which will encourage many non-working people to fake an employment status in order to enroll in the Labor Pension system. The Labor Pension Act that the Executive Yuan sent to the Legislative Yuan for deliberations originally called for an income replacement ratio of 1.3% under both systems, but legislators caved to pressure from labor groups and sweetened benefits under the Labor Pension system. As a result, many unemployed people are likely to finagle Labor Pension benefits by joining a trade union of one stripe or another, and indeed, several tens of thousands of people have applied for Labor Pension benefits just since last December. It was originally expected that the Labor Pension system would cover some 3.5 million people, but more than a million additional people may end up worming their way in, putting increased stress on government coffers, while those left in the National Pension system will as a result include a greater share of low-income beneficiaries who could push the system into crisis if too many are unable to pay their premiums.

Secondly, when legislators upped the Labor Pension income replacement ratio, they did not raise the premium rate by a quarter percentage point to 7.75% to cover the extra payouts. With 8 or 9 million beneficiaries, the funding shortfall will be considerable. Professor Lin expects the Labor Pension system to face a crisis within the next 20 years.

Thirdly, excluding aging farmers from the National Pension system also promises to put added pressure on government finances.

Lin laments, "They had convinced the farmers to accept enrolment in the National Pension system on the assurance that doing so wouldn't affect the interests of farmers aged 38 or older." But now that the farmers have been excluded from the National Pension system, candidates for elective office in the future are quite likely to promise raises to the senior citizen allowances paid to old farmers. The influence of pork-barrel election promises will be hard to fight. Lin urges the government to rectify these problems as quickly as possible to ensure fair allocation of resources and lay the foundation for a just system that can function smoothly long into the future. Otherwise, he cautions, the chickens will come home to roost with our children and grandchildren.