SOCIAL WELFARE DEVELOPMENT IN SOUTH KOREA: A LABOUR PERSPECTIVE

By Sunwoo Lee and In-Jae Lee, with thanks to Social Development in Asia, edited by Kwong-Leung Tang

South Korea's economy has fallen into serious crisis since 1997 and is now under the control of the International Monetary Fund (IMF). The current economic troubles were unexpected, but the causes seem to be rooted deep in the South Korean economic structure.

National Pension Plan

The National Pension Plan (NPP) was launched in 1988 as a social insurance system. The NPP provided compulsory old-age insurance benefits for all workers between the ages of 18 and 60 who were employed at firms with five or more employees. Farmers, fishermen, and the rural self-employed became compulsorily insured in 1995. The self-employed in urban areas could join the NPP voluntarily. Government employees, insured by three separate pension schemes, are excluded from the NPP.

Types and Levels of Pension Benefits

The NPP has three types of benefits: old-age pension, disability pension, and survivor's pension. Workers employed at firms with five or more employees, farmers, fishermen and the rural self-employed between the ages of 18 and 59 are covered compulsorily. Workers employed in firms with less than five workers and the urban self-employed are covered voluntarily.

Full benefit of the old-age pension is payable at age 60 to persons with at least 20 years of contributions. Reduced benefits are available to persons with at least 15 years of contributions at the reduced rates of 72.5-92.5 percent of basic benefit. If a person is entitled to full benefit, but has a job with income, the pension will be reduced to 50-90 percent of the basic benefit. With at least five years of contributions, those who were between the ages of 45 to 60 at the onset of the NPP in 1988 are entitled to monthly payments at the reduced rates of 25-70 percent of the basic benefit.

Disability pension is available to persons who become disabled as a result of sickness or injury with at least a year of contributions and is payable according to the degree of disability at 40-60 percent of the basic benefit.

Survivor's pension is payable to an insured person's spouse, child (under 18 or with a second degree of disability at any age), or parent (including parent of spouse) when s/he dies with at least one year of contributions. The rates of benefit are 40-60 percent of the basic benefit. Lump-sum death benefit is payable to a person with less than 15 years of contributions.

Levels of pension are determined in two parts: basic benefit and supplementary benefit. The basic benefit consists of three parts: a fixed part, a part proportional to income, and a part proportional to periods of contributions. The fixed part is offered regardless of earnings. Suppose a person's average earnings for the entire period of contributions is equal to the average earnings of all the insured. If that person contributes for 20 years, the benefit is about 40 percent of previous earnings; for those contributing for 30 years, it is 62.5 percent; for 40 years of contributions, it is 70 percent. International Labour Organisation (ILO) statistics show that South Korean pensions are low compared to developed countries. Additional annuity is given as family allowance. If a beneficiary has a spouse, children, or parents, s/he is entitled to additional pension at fixed rates per person.

Management of the National Pension Fund

The Fund is managed in public, social welfare, and financial parts. The public part of the Fund is used for government public works such as constructing Citizen's Housing and promoting small businesses. The financial part of the Fund is used for investing in stocks. The social welfare part of the Fund is spent on purchasing Citizen's Housing Fund Bonds for housing construction for workers.

In 1994, the Law of Public Capital Management Fund was enacted. It requires that the Fund be deposited into the Financial Investment and Loan Special Account to be used as government finance. The Fund Management Committee was established to be an operating body of the Fund. Committee members include senior government ministers and President of the Bank of Korea.

Several issues related to the NPP have been raised. The first issue is that those who need income maintenance most urgently are not covered by the NPP. Employees at workplaces with less than five workers, the self-employed in urban areas, the unemployed, and those who were over 60 when the NPP was introduced, are not covered by it. These are the people who need income maintenance most because they are poor.

The second issue concerns financing problems of the NPP. Two factors are threatening its solvency. First, the levels of benefits are set too high compared to the level of contributions. Second, the NPP fund has been managed so inefficiently that the profitability of the fund is dubious. The average profit rate of the fund was 10.7 percent until November 1997. The government has been using 68.9 percent of the fund as the public fund, and the National Pension Management Corporation has been investing 28.0 percent in stocks and bonds. Compared to investment in stocks and bonds, investment in the public fund has shown lower profit rates. The profit rate of the public fund was 1.95 percent lower in 1988, 2.83 percent lower in 1990, and 3.66 percent lower in 1994.

The Ministry of Health and Welfare announced a plan to reform the Pension in January 1998. According to the reform plan, benefit levels will be 55-60 percent of previous earnings.

South Korea's financial crisis since 1997 is expected to have a significant influence on the NPP. Its influence is already reflected in the reduction in level of benefit.

Life Care System

This means tested system is available for those with little or no income. Self-help care is provided for those who are able to work, while temporary Life Care is available for the low-income unemployed.

Health Insurance System

A compulsory health insurance system was introduced in 1977 under the Medical Aid programme. Since 1977 its coverage has been gradually extended from larger to smaller firms. Finally, South Korea established universal health insurance coverage in 1989.

The health insurance act required firms with 500 or more workers to organise health insurance associations, which were guided by the National Federation of Health Insurance (NFHI). The rationale behind this policy was to expand them gradually, taking the financial conditions of firms into account. This was followed by the implementation of the Public and Private School Employees Health Insurance Act in 1979, administered by the Korea Medical Insurance Co-operation (KMIC).

Thus, the employee health insurance programme was divided into two different entities: NFHI and KMIC. KMIC expanded its coverage to include the families of soldiers and primary school administrators and their dependants in 1980. NFHI gradually expanded its coverage to increasingly smaller firms, to cover those with 16 or more workers in 1983. Firms with as few as five workers could join the programme on a voluntary basis. In 1986, a special task force was formed to draft the universal health insurance plan. The task force proposed to expand health insurance to the rural self-employed prior to the urban, and to use a modified formula for levying contributions. The formula consisted of four factors - income, assets and properties, family members, and household size. By January 1988, 134 regional health insurance associations were organised to cover the entire rural population. In July 1989, compulsory coverage was extended to the self-employed in urban areas. In addition, the coverage was extended to firms with five or less workers, and to those who enrolled voluntarily. Pharmacists, physicians, crop dealers, and taxi drivers were also brought into the compulsory regional health insurance scheme.

The health security programme is divided into two: medical insurance and medical aid. Table 1 shows the number of beneficiaries of the health security system in 1996.

Medical Insurance

Medical insurance has three types of beneficiaries. First, wage earners and their dependants who accounted for 36.6 percent of the population in 1996. Second, public and private school employees and their dependants who accounted for 10.5 percent of the population. Third, Medical Aid is provided for the self-employed and their dependants who account for 49.1 percent of the population, of who about 3.8 percent of the population were eligible in 1997 (Table 1).

Table 1. Numbers of Beneficiaries of Health Security

Classification
Total Population
(ten thousand)
Proportion (%)
Medical Insurance

4,408

96.2 (100.0)

Industrial Workers

1,675

36.6 (38.0)

Public and Private School Employees

481

10.5 (10.9)

Self-Employed

2,252

49.1 (51.1)

Total

4,582

100.0

Medical Aid Total

174

3.8

Source: Ministry of Health and Welfare, Yearbook of Health and Welfare Statistics, 1997.

Benefits

Cash benefits are nominally provided in cases of nursing care, maternity, and death. For example, maternity or delivery expenses are given to cover medical expenses incurred at non-designated facilities, including home delivery.

Finance

The financial resources of the insurance system consist mainly of government subsidies and contributions paid by the insured and employers. For wage earners and public employees, contributions are based on the wages of the insured. Every employee pays the same percentage of his/her wage in the same association. Employers pay half of the contributions. Private school employees pay 50 percent of the contributions, while the school board pays 30 percent and the government, 20 percent.

The insurance programme for the self-employed is financed by government subsidy and contributions from the insured. The contributions from the insured are determined on the basis of personal income, property, and family size. The government subsidises the contributions, including the programme's administrative cost. It is supposed to subsidise 50 percent of the total expenditure of the programme, but it actually pays less than this.

Industrial Accident Compensation Insurance

The Industrial Accident Compensation Insurance (IACI) gradually extended its coverage from firms with 500 or more workers in 1963 to workplaces with five or more employees in 1994.

The definition of 'accident' now includes injuries needing four or more days of treatment.

The number of injured workers has gradually decreased since the 1980s. The accident rate declined from 3.15 percent in 1985 to 0.99 percent in 1995. But, the trend of the severity rate (number of lost working days per 1,000 working hours) is unstable. It was 2.7 percent in 1985, 2.7 percent in 1993, and 2.2 percent in 1996. Table 2 shows trends of industrial accidents.

Table 2. Trends of Industrial Accidents

Year
Firms Covered by IACI
Workers Covered by IACI
Total Injured Persons
No. of Death
No. of Injured
No. of Occupational Disease
Rate of Accident
1985

66,803

4,495,185

141,809

1,718

138,533

1,558

3.15

1990

129,687

7,542,752

132,893

2,236

129,019

1,638

1.76

1991

146,284

7,922,704

128,169

2,299

124,333

1,537

1.62

1992

154,820

7,058,704

107,435

2,429

103,678

1,328

1.52

1993

163,152

6,942,527

90,288

2,210

86,665

1,413

1.30

1994

172,871

7,273,132

85,948

2,678

82,352

918

1.18

1995

186,021

7,893,727

78,034

2,662

74,252

1,120

0.99

Note: Rate of Accident = Injured persons/workers covered by IACI.
Source: Korea Labour Institute, The Profile of Korean Human Assets: Labour Statistics 1997, May 1997.

Coverage

The number of employees covered by the IACI was 8,156,894 in 1996 which included employees at workplaces with five or more workers. Financial institutions are not covered by the IACI. Table 3 shows the number of workers covered by the IACI by industry and year.

Table 3. Number of Workers Covered by IACI by Industry and Year

Industry
Workers (1992)
Workers (1993)
Workers (1994)
Workers (1995)
Total

7,058,704

6,942,527

7,273,132

7,893,727

Forestry

3,931

4,958

6,519

9,501

Fishing

2,804

3,611

3,752

3,730

Agriculture

12,060

11,558

12,107

13,828

Mining

54,556

45,344

40,308

35,291

Manufacturing

3,225,717

3,066,846

3,084,827

3,066,431

Electricity, Gas
and Water

43,255

53,250

53,674

49,419

Transport,
Storage, and
Communication

579,983

603,882

641,032

715,058

Construction

1,911,378

1,816,892

1,978,629

2,240,990

Others

1,225,020

1,336,186

1,452,284

1,759,479

Source: Ministry of Labour; 1996 Yearbook of Labour Statistics.

Provision

Injured workers may receive six types of benefits: medical care, sick leave, disability, survivor, death, and disabled survivor. Table 4 shows expenditure by the types of benefits in 1996.

Table 4. Expenditure by the Types of Benefits.

 
Total
Medical Care
Sick Leave
Disability
Survivor
Disabled Survivor
Death
Cost

1,355,337

342,974

435,729

347,751

179,502

32,782

16,598

%

100.0

25.3

32.1

25.7

13.2

2.4

1.2

Note: Units: Millin Won, %
Source: Ministry of Labour; Yearbook of Industrial Accident Compensation.

Finance and Management

The IACI is financed solely by employers. The government may pay the administrative costs of the insurance. It is under the control of the Ministry of Labour, but it is the Labour Welfare Co-operation that actually manages it.

Employment Insurance

The Employment Insurance (EI) system became effective on 1 July 1995. The system has two aims. One is to provide unemployed workers with unemployment benefits. The other is to enhance employment stability and the job ability of workers through active labour market policy measures within the framework of the EI. This is why the system is called 'employment insurance' rather than 'unemployment insurance'. The unemployment insurance system is a form of social insurance to alleviate workers' hardship while unemployed by paying cash benefits to the insured.

There is a widespread negative image of unemployment insurance in South Korea because of fears that it may increase the unemployment rate. Therefore, the EI was introduced in South Korea. The EI includes unemployment benefit schemes, active labour market schemes such as active job placement through a public employment office network, job security schemes, and job ability development schemes.

Coverage

The three elements of the EI have different coverage. By 1998, the Unemployment Insurance Schemes covered all the workers including the self-employed except workers employed on a seasonal basis. The Employment Stabilisation Schemes and Job Ability Development Schemes cover full-time workers of firms with 70 or more workers. The number of employees covered by the EI was 4,325,940 in 1997. The EI covers 32.5 percent of the total employees, 13,319,000.

Workers employed on a seasonal basis, or whose employment is semi-illegal, are excluded from the EI's coverage because it is very difficult to identify their employment status and wages. Public employees and teachers are not covered by the EI because they have their own insurance systems and are not threatened by forced redundancy.

Finance and Management

Unemployment insurance is financed by contributions from workers and/or their employers, but the government does not contribute. The insured get unemployment benefits directly from the EI and have to pay half of the contributions to the Unemployment Benefit schemes.

Employers are responsible for unemployment and get benefits from the Employment Stabilisation Schemes and Job Ability Development Schemes. Therefore, employers pay half of the contributions to the Unemployment Benefit Schemes, and pay the entire costs of the Employment Stabilisation Schemes and Job Ability Development Schemes. The government may pay the administrative costs of the system. The EI is directly managed by the Ministry of Labour.

How will South Korea respond to her economic crisis?

South Koreans say the current economic situation controlled by the IMF is South Korea's most serious hardship since the Korean War. The number of unemployed is expected to go over two million. Considering that the South Korean government counts a person employed even if s/he only works for one hour per week, it must be recognised that the unemployment rate has been under-estimated. Therefore, the current economic crisis may be much more damaging to the life of Korean people. But, the Kim Dae-Jung Administration has been focusing on economic problems rather than on the social welfare needs of the people. It seems that the current crisis is reducing South Korean social welfare systems rather than expanding them.

It is not sure yet when the IMF control and the economic crisis will end in South Korea. But, it is likely that the life of South Korean people will become much worse than before. Massive unemployment is on the way, but the government is not willing to expand its efforts for social welfare.