[EAI Special Report Series] Evaluation of the First Year of the Yoon Suk-yeol Administration and Tasks for the Next Four Years ③: Social Reform

Initiating the Yoon Suk-yeol Administration's Social Reform Drive

It has been one year since the Yoon Suk-yeol administration, which presented "A Re-leaping Republic of Korea, a Nation Where All Citizens Thrive Together" (Presidential Transition Committee 2022) as its state vision, was inaugurated in May 2022. Unlike previous power transitions since the 1987 direct presidential election, the Yoon Suk-yeol administration is a new government after only five years, not ten. This premature power transition was possible not due to support for President Yoon, but due to the policy failures of the preceding Moon Jae-in administration. This is likely why President Yoon's approval rating at the time of inauguration was only about two-thirds of that of his predecessors. Having come to power based on the policy failures of the previous administration, the Yoon Suk-yeol administration is partially pursuing new policies while dismantling the signature policies of the Moon Jae-in administration. This is why the title of the performance report on state tasks published on the first anniversary of the Yoon Suk-yeol administration's inauguration was "Restoration of Liberal Democracy and Market Economy in One Year" (Ministry of Government Policy Coordination 2023).

In a presidential system characterized by a winner-take-all structure, reversing the policies of one's predecessor is not new. North Korea policy is a prime example. Depending on whether a left-leaning or right-leaning government is in power, policies can be diametrically opposed. However, the outcome of this power transition is not limited to a change in North Korea policy. The direction of domestic economic and social policies has significantly shifted. Real estate policies, which were centered on regulation and punitive taxation, have pivoted towards market restoration and tax normalization, including property tax reductions. The nuclear phase-out policy has been abandoned, and efforts are underway to revive the nuclear power ecosystem. The dismantling and opening of the Four Major Rivers project have been halted, and water resource management through the Four Major Rivers is being pursued. The administration is moving away from pro-labor union stances to a pro-business orientation, emphasizing the importance of exports. Beyond curbing the rapid increase in national debt, legislative attempts are being made to establish fiscal rules.

Social policy areas are no exception. At the first State Affairs Assessment Meeting chaired by the President at the Cheong Wa Dae State Guest House on December 15, 2022, pension, labor, and education reforms were declared as the three major reform tasks. The direction of these reforms is in stark contrast to those of the preceding Moon Jae-in administration, particularly in the areas of pensions and labor. The Moon Jae-in administration pursued pension reforms focused on securing old-age income rather than financial stability and implemented pro-labor union policies both internally and externally. In contrast, the new administration is emphasizing pension reforms that prioritize intergenerational equity and financial stability over enhanced old-age income security, and is calling for labor market economic policies that emphasize flexibility and stability in labor relations through the rule of law.

At the first State Affairs Assessment Meeting in December 2022, President Yoon emphasized that the three major reforms are "not optional but essential for Korea's sustainability" and stressed that "reforms are unpopular tasks, but they must be undertaken without evasion" (Han Ji-hoon 2022). In his policy address to the National Assembly after taking office, President Yoon had declared pension, labor, and education reforms as the new administration's three major reform tasks, and once again clearly demonstrated his commitment to driving these reforms.

However, despite the president's expressed will, the reform process is not smooth. The direction of pension reform is unclear, and labor reform appears to be adrift. Pension and labor reforms are inherently difficult due to the nature of the policies. The costs of reform immediately affect most voters, while the benefits are uncertain and can only be reaped in the medium to long term. To stabilize the finances of the National Pension, premiums must be raised immediately, but people question whether they will receive pensions in 30-40 years. While labor market flexibility would boost the economy, there are concerns about job insecurity. Although corrupt labor unions are undesirable, the anxiety of losing the protection of unions is also a reality.

Furthermore, since the administration's inauguration, the National Assembly has exhibited the most extreme minority-party-dominant situation since the 1987 democratization. The government must contend with the Democratic Party of Korea, which holds 168 seats, a staggering 59 more than the ruling People Power Party's 109 seats. Other minor parties, such as the Justice Party, are also aligned with the progressive camp. Although the Yoon administration has initiated reform drives, the prospects for legislative success are slim. Moreover, these reforms aim to reverse the policy direction of the previous Moon Jae-in administration. Unless the ruling party achieves a landslide victory in the 2024 general elections, the feasibility of these reforms is politically unlikely.

There are still four years remaining, so it is too early to definitively assess the success or failure of these reforms. However, reforms are more likely to succeed if driven early in the administration rather than in the latter half. This point, one year into the term, is an opportune moment for a mid-term evaluation and to offer recommendations for reform success. Therefore, this report will examine the Yoon Suk-yeol administration's reform direction, focusing first on pension and then on labor policies, review the past year, and present future tasks.

Pension Reform Coordinates and One Year's Achievements

In the realm of social reform, pension reform was a task on which presidential candidates from both major parties reached an agreement during the 20th presidential election campaign. However, it was not clear whether pension reform meant financial stabilization or strengthening old-age income security. Lee Jae-myung, the Democratic Party candidate, agreed with the general principle of pension reform with Yoon Suk-yeol and Ahn Cheol-soo, but his pledge was to "reform the public pension system to eliminate gaps in old-age income security and ensure adequate old-age income through cooperation between the state and individuals" (Democratic Party of Korea 2022). This indicates that the direction of pension reform was focused on enhancing income security, similar to the preceding Moon Jae-in administration.

In contrast, candidate Yoon Suk-yeol's stance was to emphasize the financial stability of the National Pension while addressing the poverty issues of the current elderly generation. Candidate Yoon consistently expressed the view that "pension reform is a historical task that cannot be irresponsibly delayed" and that "pension reform will involve pain, but it must be done so that future generations can also enjoy stable pensions." Furthermore, he presented a broader vision, stating that "considering the deepening low birthrate and aging population, and the burden on youth and future generations, structural reform beyond parametric reform within the National Pension is necessary," and proposed to "restructure the overall old-age income security system, encompassing basic livelihood security, basic pension, National Pension, retirement pension, and private pensions, to pursue both goals of security and sustainability" (Korean Policy Sciences Association and Korean Public Administration Association 2022).

Coincidentally, 2023 is the year for the financial reassessment of the National Pension. According to Article 4 of the National Pension Act, the government must evaluate the National Pension's finances and conduct long-term projections every five years. As stipulated in the National Pension Act, the government must prepare a pension reform plan that ensures the "long-term balance of the National Pension finances" by the end of September and submit it to the National Assembly in October. As 2023 marks the first year of the administration, pension reform is bound to be a major topic. Accordingly, the Yoon Suk-yeol administration established and is operating the Special Committee on Pension Reform in the National Assembly in November 2022 and the 5th National Pension Financial Reassessment Committee within the executive branch.

The pension reform committees currently operating in the government and the National Assembly are discussing both 'financial stabilization plans' and 'benefit enhancement plans.' The 'benefit enhancement plan' aims to increase the income replacement ratio of the National Pension from the current 40% to 50%. In a situation of demographic aging with a declining working-age population, 'benefit enhancement' is an unusual proposal rarely seen in other developed countries. However, the high rate of elderly poverty in Korea serves as the basis for the argument for benefit enhancement.

The 'financial stabilization plan' proposes to maintain the current income replacement ratio of 40% for the National Pension while increasing the contribution rate to 15% to alleviate projected deficits. It also aims to reduce expenditures by raising the pension benefit commencement age from 65 to 67. The introduction of an automatic stabilizer, which automatically reduces pension benefits as the old-age dependency ratio (the number of elderly per 100 working-age individuals) increases, is also under discussion. If all these measures are implemented, it is projected that there will be no issues with National Pension payments for the next 70 years.

Proponents of National Pension financial stabilization argue that the poverty issue among the current elderly generation should be addressed through a rational reform of the basic pension system, not the National Pension. The proposal is to significantly reduce the scope of the basic pension, which currently covers up to 70% of all elderly individuals, to those below the poverty line, while increasing the guaranteed level to help them escape poverty (approximately 600,000 won per person).

The financial stabilization plan generally aligns with the reform blueprint presented by President Yoon Suk-yeol during his presidential campaign. In contrast, the benefit enhancement plan can be seen as an extension of the policy direction of the previous Moon Jae-in administration. The National Assembly's Special Committee on Pension Reform has temporarily suspended its activities after identifying these two opposing reform proposals. It remains to be seen what reform alternatives will be developed by the government's National Pension Financial Reassessment Committee. It is likely that proposals somewhat aligned with the president's financial stabilization reform policy will form the majority within the Financial Reassessment Committee, but specific designs are difficult to predict at this stage. Furthermore, with the Democratic Party, led by Lee Jae-myung, who emphasizes benefit enhancement, dominating the National Assembly, and with the ruling party, whose presidential approval rating is in the low 30% range, unlikely to achieve a landslide victory in the 2024 general elections, financial stabilization pension reform will not proceed smoothly.

Labor Reform Coordinates and One Year's Achievements

Unlike pension reform, the labor sector did not receive significant attention during the last presidential election campaign. This was because candidate Yoon Suk-yeol showed a considerably progressive stance on labor issues, even promising a public sector labor director system, and did not confront or clash with other candidates like Lee Jae-myung. Even in the early stages of the administration, the labor sector did not become a major issue. A former Korean Confederation of Trade Unions (KCTU) official was appointed as the Minister of Employment and Labor, and despite concerns from the business community, the time-off system for public officials and teachers' unions was introduced, following the public sector labor director system.

However, the Yoon Suk-yeol administration began to show a change in labor-government relations following the first strike by the Cargo Solidarity union in June 2022 and the illegal occupation by the subcontracted labor union at Daewoo Shipbuilding & Marine Engineering in July. The administration declared its intention to "respond to illegal activities by unions such as the Daewoo Shipbuilding subcontracted labor union and Cargo Solidarity in accordance with laws and principles" (Ministry of Employment and Labor 2023), issued a work-start order for the second Cargo Solidarity strike, and is taking strong measures against violence and illegal activities in construction sites by strengthening union accounting transparency through demands for disclosure of accounting records and audits for refusal (Presidential Office New Media Planning Office 2023).

Meanwhile, on June 23, 2022, the Ministry of Employment and Labor announced its 'Plan for Promoting Labor Market Reform,' initiating labor market reforms centered on reforming working hours and wage systems. This is a key implementation task of the state agenda of 'Building a Cooperative Labor Market through Labor-Management Cooperation,' and includes expanding the settlement period for selective working hours, introducing a working hour savings account system, managing the total amount of overtime hours, easing working hour regulations for specialized professions in startups, and strengthening the provision of wage information by job and occupation through a wage-job information system (Office of the 20th President 2022).

The flexibility of working hours promoted by the Yoon Suk-yeol administration is not solely for improving business efficiency but is intended to provide workers with control over their time, thereby mitigating the rigid and uniform nature of working hours. Furthermore, with the increase in remote work and flexible work arrangements following the COVID-19 pandemic, and the spread of platform labor, employment forms have diversified, and work styles have undergone significant changes. This is not a temporary phenomenon but a structural change driven by the rapid diffusion of digital technology and the prolonged COVID-19 pandemic, making the flexibility of working hours a timely necessity (Choi Young-ki 2022).

<Figure 1> Ratio of Wage Gap by Years of Service Compared to Less Than One Year of Service

Source: Ministry of Employment and Labor, 2022 Work Report. Reprinted from Choi Young-ki (2022).

Reforming the seniority-based wage system to a job and performance-based wage system has been a long-standing reform task pursued by successive governments, albeit with varying degrees of intensity. As of 2021, 55.5% of companies with 100 or more employees in South Korea operate a seniority-based wage system, and this figure rises to 70.3% for companies with 1,000 or more employees. Furthermore, the wage increase rate based on years of service is the highest among member countries of the Organization for Economic Co-operation and Development (OECD) (Figure 1). High seniority-based wages make it difficult to employ older workers and hinder long-term service, which are disadvantages in an era of demographic aging. Moreover, wage systems based on seniority and length of service that operate only within specific companies hinder labor mobility and lead to segmentation in the labor market. It is also a disadvantageous wage system for female workers who face difficulties in career progression due to childbirth and childcare. Therefore, transitioning to a wage system based on job, skill, and performance that is equally applied in the labor market was also a task of the times.

However, labor market reform faced a crisis from the outset, with the debate over working hours being framed by terms like '92 hours per week' and '69 hours per week,' leading to the potential derailment of both working hour flexibility and wage system reform. The government's trusted MZ unions also sided with the criticism from the Korean Confederation of Trade Unions (KCTU), which argued that the reforms would "nullify the 52-hour workweek system, allow for unlimited extension of working hours, expand the scope of working hour flexibility, increase the scope of job-based performance pay to enhance employers' performance evaluation authority and reduce wages, and foster conflict among workers" (Park Tae-woo 2022), causing public opinion to turn against the reforms.

As of one year into the Yoon Suk-yeol administration, labor reform aimed at establishing the rule of law and reforming labor unions is receiving public support. However, labor market flexibility reform is not in the same position. In fact, the latter, rather than the former, is a necessary task for the long-term development of the Korean economy and the improvement of citizens' quality of life, yet it has not progressed even one step.

What Should Be Done Over the Next Four Years?

Pension reform, particularly financial stabilization reform, is an unpopular policy among the majority of voters. It is a policy area where the politics of blame avoidance prevails. In Korea, where the high level of political maneuvering seen in Sweden's case—where pension reform was undertaken with bipartisan agreement for the sake of future generations—is difficult to expect, the only possibility for reform lies in the preparation of reasonable pension reform proposals, public persuasion, and the president's will and leadership to guide this process.

As the working-age population capable of paying insurance premiums shrinks and the number of retirees receiving pensions continues to grow, the global trend in pension reform is to abolish (South America) or reduce (Sweden, Germany, etc.) pay-as-you-go (intergenerational transfer) pension systems and instead expand funded pension systems based on individual accounts, which are independent of demographic aging.

Applying this to Korea, the National Pension and basic pension, which rely on the insurance premiums and taxes paid by the working population, would need to be reduced. While various options exist, one possibility is to lower the income replacement ratio of the National Pension to 30%, significantly reducing the burden of premium increases, and to shift the basic pension to a selective approach, providing it only to impoverished elderly individuals. If the pay-as-you-go public pension system is reduced, the resulting shortfall in old-age income would need to be supplemented by the retirement pension system, which is a statutory and funded system. In 2021, employers contributed approximately 50 trillion won in retirement pension premiums. This is a substantial amount, nearly equivalent to the 51 trillion won in National Pension premium revenue for the same year. However, most retirees receive their retirement pensions as lump sums, similar to severance pay. Pension receipts account for only 4.3% of accounts and 34.3% of the amount. Strengthening the conditions for mid-term withdrawals and lump-sum payments, and encouraging pension-based receipts, would result in a pension with an income replacement ratio of 20%. This would sufficiently supplement the reduced pay-as-you-go National Pension (Yang Jae-jin 2022).

The combination of 'National Pension + Retirement Pension' can ensure old-age income security for the middle class without requiring additional national finances. This would allow national finances to be concentrated on low-income elderly individuals. A robust basic pension should be provided to low-income elderly individuals who do not benefit from the National Pension and retirement pension, helping them escape poverty.

The problem, as pointed out earlier, is that pension reform for financial stabilization is unpopular. The pension reform of 2007, which achieved financial stabilization, was possible primarily due to President Roh Moo-hyun's commitment to reform. After proposing the reform bill in 2003, he continuously emphasized the inevitability of pension reform, and the bill was passed by the National Assembly at the end of his term in 2007. The same was true for the reform of the public officials' pension in 2015. It was the result of President Park Geun-hye pushing it through despite opposition from public officials' unions. If personal interests are set aside, everyone must acknowledge the inevitability of pension reform. The president's reform leadership, which provides objective information about the inevitability of pension reform and the effectiveness of reform alternatives to persuade the public and the opposition party, is urgently needed (Yang Jae-jin 2023).

Labor reform is also a challenging task, as difficult as pension reform. While labor union reform is relatively well-received by the public, it provokes backlash from labor unions, making labor market reform even more difficult. In such a situation, a possible approach, similar to Prime Minister Thatcher in the UK, could be to risk the fate of the administration by confronting and dismantling labor unions, and then completing labor market reform through government-led legislative changes. But is this feasible? Unlike Britain in the Thatcher era, in the Korean context where the opposition party, which is pro-labor union, holds an absolute majority, this path is impossible. Although unlikely, the only viable path is to lead labor market flexibility and stability reforms through labor-management-government agreements, like the Wassenaar Agreement, under Prime Minister Lubbers of the Netherlands (Choi Young-ki 2022).

In fact, the flexibility of wages and working hours, and the subsequent mitigation of the dual structure in the labor market, which the Yoon Suk-yeol administration is currently pursuing, are no different from the 'Labor Market Structure Improvement Labor-Management-Government Agreement' (September 15 Grand Compromise) that was already reached in the Tripartite Commission (now the Economic, Social and Labor Council) during the Park Geun-hye administration in 2015. Although it did not lead to legislation at the time, there was an experience of approaching the Dutch model.

However, the Yoon Suk-yeol administration is currently pursuing reforms led by the Ministry of Employment and Labor, rather than the Economic, Social and Labor Council (ESLC). Furthermore, the reform proposals were developed not by labor-management representatives but by the 'Future Labor Market Research Group,' composed of 12 scholars and experts. The reform proposals themselves are not problematic. As mentioned earlier, they represent a direction that is globally recognized and were pursued by the Park Geun-hye administration. The issue is whether labor market reform can be achieved with the participation of the KCTU, the Federation of Korean Trade Unions (FKTU), and the MZ unions. Can reform bills drafted without their participation be passed by the National Assembly?

Illegal activities by labor unions must be dealt with according to principles. However, there is no need to excessively provoke labor unions through measures such as accounting audits or subsidy reductions. Moreover, the agenda for labor market reform should be handled within the ESLC, as it has been by previous administrations. At this time, MZ unions and representatives of non-regular workers must also be allowed to participate. Similar to pension reform, the president's sustained interest and will are the keys to success in labor reform. However, unlike pension reform for future generations who are yet to be born, labor reform involves existing stakeholders. Various groups within labor and management, as well as within the labor sector itself, are in tense and sharp conflict. Rather than excluding them, creating a public forum and exercising leadership to facilitate compromise between labor and management is a more realistic path, even if it takes time. ■

References

Ministry of Employment and Labor. 2023. "2023 Major Work Promotion Plan: Labor Reform, Unwavering Progress to Resolve Dual Structure." January 9.https://www.moel.go.kr/news/enews/report/enewsView.do?news_seq=14508

Ministry of Government Policy Coordination. 2023. "One Year of Restoring Liberal Democracy and Market Economy, Major Achievements of 120 State Tasks." Korea Policy Briefing. May 3.https://www.korea.kr/archive/expDocView.do?docId=40468

Democratic Party of Korea. 2022. 『Democratic Party of Korea 20th Presidential Election Policy Pledge Book: Customized Pledges for You, Moving Forward Properly』. February 22: 111.

Presidential Transition Committee Planning and Coordination Division. 2022. "State Vision and Principles of State Administration." Korea Policy Weekly 『Gonggam』. May 2.https://www.korea.kr/news/policyNewsView.do?newsId=148901235

Office of the President of the Republic of Korea, New Media Planning Office. 2023. "President Yoon Emphasizes 'Rule of Law, Flexibility, Fairness' as Three Key Tasks for Labor Reform." February 28.

Park Tae-woo. 2022. "Yoon Suk-yeol's Era of Overwork? The '92-Hour Work Week' Era Approaches." 『Hankyoreh』 June 23.https://www.hani.co.kr/arti/society/labor/1048191.html

Yang Jae-jin. 2022. "Research on the Necessity and Methods of Making Retirement Pensions Quasi-Public Pensions." 『Journal of Korean Policy Sciences』 31, 1: 51-76.

_____. 2023. "How Should Korea's Pension Reform Be Carried Out?" 『East Asia Foundation Policy Debate』 No. 193. March 29.

Office of the 20th President. 2022. 『Yoon Suk-yeol Administration's 120 State Tasks』. Korea Policy Briefing. July 27.https://www.korea.kr/archive/expDocView.do?docId=40075

Choi Young-ki. 2022. "Prospects and Tasks for the Yoon Suk-yeol Administration's Labor Reform." 『Labor-Management Forum』 No. 57: 16-46.http://nsgkorea.org/content/68

Korean Policy Sciences Association and Korean Public Administration Association Presidential Election Pledge Evaluation Committee. 2022. "Review of Sectoral Policy Pledges for the 20th Presidential Election: People Power Party Candidate Yoon Suk-yeol's Response." January 12.

Han Ji-hoon. 2022. "Yoon Emphasizes 'Unpopular but Necessary'... Presents Reform Roadmap for '3 Major Tasks + Health Insurance'." 『Yonhap News』 December 15.https://www.yna.co.kr/view/AKR20221215157600001?section=search

■ Author:Yang Jae-jinProfessor of Public Administration at Yonsei University. President of the Korean Association of Social Security Studies.

■ In charge and edited by: Park Ji-soo, EAI Research Fellow

    Inquiries: 02 2277 1683 (ext. 208) | jspark@eai.or.kr