Pension Reform Made in Taiwan

Written by Gunter Schubert.

On June 27th, Taiwan’s Legislative Yuan passed a package of pension reforms which are, arguably, doing away with decades of privileged benefits for retired civil servants from  January 1st, 2018. Another law to end special treatment of retired teachers passed final reading on June 28th, and new legislation targeting retired military personnel is on the way. The DPP government has made good on a longstanding promise to reform Taiwan’s pension system before it goes bust. According to government calculations, that was set to happen around 2031 for civil servant retirement payments and 2030 for those of teachers. Without proper fiscal adjustments, retirement funds for private-sector workers and retired servicemen will run out in 2027 and 2020 respectively.

Current pension liabilities of the government stand at some NT $18 trn ($597bn) according to a recent article in The Economist, which is about nine times its total annual expenditure. Obviously, something had to be done to the pension system, and it has been certain for a long time that the first to be hit would be Taiwan’s 450.000 retired public officials and military personnel. The new law for civil servants stipulates that an annual 18-percent preferential interest rate on the payments to civil servants will be gradually reduced over a period of 30 months and end up at zero from 2021 for those who receive their payments in monthly instalments. Retired civil servants who have opted for a lump sum will see the percentage of interest drop over a period of six years until it reaches six percent. Moreover, the income replacement ratio will gradually fall from 45 percent to 30 percent over the course of 10 years for those who have worked at least 15 years, and from 75 percent to 60 percent over a period of 10 years for those who have worked 35 years or more.

Finally, the retirement age (Taiwanese civil servants can stop working at 55) will gradually rise by one year beginning from 60 in 2021 to reach 65 in 2026. Retired teachers, for their part, face similar changes. Their income replacement ratio has been lowered 1.5 percent to 73.5 percent starting in 2020 before gradual reductions to 60 percent over 10 years for those who have worked for 35 years or more. Retired teachers, who have worked 15 years or more face a decrease from 45 percent to 30 percent over the same period. Also, the retirement age of teachers is lifted from 50 to 58 years by July 1st, 2018. Both laws stipulate a ‘pension floor’ of NT $32,160 where no cuts apply in order to guarantee a basic retirement income. Through these measures, the government estimates that current retirement funds can be kept operational for another 10-15 years. This means that reforms must proceed further in order to make the pension system sustainable over time, and it will certainly touch other groups in the future as well.

The measures taken so far sound reasonable to Europeans who are already facing serious cuts to retirement benefits across the board. However, those groups targeted by Taiwan’s recent pension reforms cry foul. Since last year, tens of thousands have demonstrated relentlessly against the government’s plans. In a number of instances, critics of the government crossed a line between protest and violence, threatening President Tsai Ing-wen with murder and promising to bring turmoil to the country. But also more moderate voices in the KMT have strongly criticized the new legislation. They all contend that the DPP government has violated the judicial principle that no law must be applied retroactively and that ‘legitimate expectations’ stemming from past laws must be properly protected. This particularly refers to the scrapping of the 18-percent interest rate on annual retirement sums and the lowering of the income replacement ratio, measures which cut deeply into pensioners’ income, leaving quite a number of them barely above subsistence levels.

The Council of Grand Justices could be called to decide on the constitutionality of the new pension laws. There is a precedent for this. Through constitutional interpretation no. 117 passed in 2014, the court found the reduction of preferential interests on retirement savings as constitutional in principle. At the time, however, the Constitutional Court also ruled that ‘(L)aws and regulations that grant financial interests to the people and that carry a predetermined period of applicability, within the said period of time should be accorded a relatively high level of trust. Unless there is an urgent matter of public interest, they should not be curtailed. Should new regulations be issued after the expiry of the said period of time then the issue of reliability does not arise.’ Hence, the non-retroactivity of the  new legislation is conditional on the level of overall public interest.

Quite naturally, the ruling DPP sees no inclination to question its own legislation, and the opposition KMT alone lacks the necessary quorum in the Legislative Yuan to call for a constitutional interpretation by the Council of Grand Justices. It could reach that quorum if the three parliamentarians of the People’s First Party, a usual ally of the KMT, and another independent legislator voted with the opposition. Interestingly, however, the PFP has so far declined to cooperate with the KMT. For one part, the PFP argues that pension reform is overdue as the existing system is unfair and the Council of Grand Justices would confirm just that. Moreover, it has come up with its own reasoning for  a request for constitutional interpretation, arguing for better protection of firefighters, police officers, nurses and doctors in the new laws as these constituencies are more vulnerable than most other civil servant groups.

Retired civil servants, teachers and military personnel were a  privileged group early on in post-war Taiwan, and partly for good reasons. Their salaries were low in a rising export economy with an expanding private sector. Special retirement benefits were meant to equalize the relative loss of material well-being in old age compared to those who thrived in Taiwan’s private economy. As their privileges were protected by the government throughout the authoritarian era, most voters from these groups have been staunch KMT supporters. When Taiwan’s growth-with-equity model began to lose steam in the 1990s, with most people in the non-public sector facing meagre pensions in a system which provided little support, public officials and military servicemen gained disproportionately from their special retirement benefits. Even when it became clear that this system was eating up Taiwan’s fiscal resources, KMT governments – including the most recent administration led by Ma Ying-jeou – shied away from reform as they feared losses at the ballot box. It is hypocritical for KMT politicians to accuse the DPP administration of discrimination against civil servants, teachers and soldiers – there is widespread consent within the Taiwan populace that their current privileges are not justified anymore.

Taiwan’s recent pension reforms show that sometimes political (and legal) dilemmas can only be solved by determined leadership. Tsai Ing-wen has used her mandate to implement necessary, though controversial, reforms through democratic means. She has absorbed both the criticism and the responsibility. A constitutional interpretation has not yet been called, but it is a possibility enshrined in Taiwan’s  law. Radical groups have threatened the government and individual politicians with violence, and some KMT politicians have claimed that Taiwan is turning into a dictatorship. But opponents to pension reform should respect democratic procedure and the public’s support  for pension reform, using legitimate channels to air their dissatisfaction and argue rationally to challenge the government’s position.

Gunter Schubert is Chair Professor of Greater China Studies and the director of the European Research Center on Contemporary Taiwan (ERCCT) at the University of Tübingen. Image Credit: CC by Office of the President of the Republic of China (Taiwan)/Flickr.