Social Welfare Reform Since the 1997 ... - Wiley Online Library

Asian Social Work and Policy Review 1 (2007) 21–35

ORIGINAL ARTICLE

Social Welfare Reform Since the 1997 Economic Crisis in Korea: Achievement, Limits, and Future Prospects Inhoe Ku Department of Social Welfare, College of Social Sciences, Seoul National University, Seoul, Korea

Social welfare reform has been implemented in Korea since the 1997 financial crisis. A dominant concern of the reform was on equality and social solidarity. A major means to this end was establishing universalistic social insurance programs like those in developed welfare states. The reform efforts produced some positive results but were not greatly successful. Income polarization and the deteriorating economic status of low-income families have become big social issues. Many low-income families have not gained many benefits from the reformed social security system. The rapid aging of the population is creating an exploding demand for social spending, risking the fiscal sustainability of major social insurance programs. The reform experience suggests that a social welfare system based on western-style universal social insurance may be too expensive to sustain and not very effective in protecting disadvantaged families in Korea. More attention is being paid to expenditure control and efficiency. Social insurance programs may need to be leaner than those in traditional welfare states. Targeted programs, such as the ‘‘making work pay’’ policy, are likely to be expanded more broadly to low-income families. The future of the Korean welfare state may hinge on successful employment support for working families and extensive investment in their human capital. Keywords employment support; financial crisis; social welfare reform; targeted programs; universalism doi:10.1111/j.1953-1411.2007.00003.x

Introduction The rapid economic growth of South Korea is well known. Before its industrialization, Korea was among the poorest countries in the world. Now the Korean economy is the world’s 11th largest. The country experienced an 8–9% real GDP growth rate a year on average during the 1970s and 1980s and a growth rate of more than 6% during the 1990s. The active role of the government has been recognized as an important contributor to this unprecedented economic growth. Correspondence concerning this article should be addressed to Dr Inhoe Ku Department of Social Welfare, College of Social Sciences, Seoul National University, San 56-1, Sillim-dong, Gwanak-gu, Seoul 151–746, Korea. Email: [email protected] 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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Welfare Reform in Korea

During the industrialization period, regular workers in large firms were guaranteed employment protection and limited social security benefits. These core workers generally supported their family members as male breadwinners. The distribution system was well matched with the notion of a stable traditional family. The almost full employment sustained by the rapidly expanding economy kept the distribution system working without serious interruption. The onset of the 1997 financial crisis brought this impressive economic growth to a halt. The unemployment rate rocketed from 2.5% to a peak of 8.5% in early 1999. Millions of Koreans were thrown into poverty. While the crisis hit many families hard, lowincome families suffered the worst. Since a social policy was not adequately developed, the economic crisis directly led to a social crisis. This crisis was not a passing phenomenon and soon revealed that the old social model could no longer be sustained. Right after the onset of the crisis, structural reform toward a new social model was implemented. These reform efforts produced positive results in some ways, but were not greatly successful in addressing the many new challenges that have since arisen. Rising income inequality and the deterioration of the economic status of low-income families have become big social issues. Many low-income families have not gained any benefits from the reformed social welfare system. The rapid aging of the population, combined with a reduced pace of economic growth, is creating an exploding demand for social spending but at the same time is placing limits on the government’s financial capacity. Thus, another round of social welfare reform is likely to be initiated, and some relevant issues need to be closely examined. This article assesses the social welfare reform efforts in Korea since the late 1990s. In the next section, the reform efforts are reviewed, followed by an examination of the impact of the reform in relation to new challenges. In the final section, some lessons are drawn from the experiences of social development in Korea.

Social welfare reform after the financial crisis of 1997 Social context of the financial crisis During South Korea’s first half-century as a nation, the Korean government played a minimal role in developing social welfare programs. Social security programs were gradually introduced in the 1960s and 1970s. For instance, work injury insurance and a public assistance program called the livelihood protection program were introduced in the early 1960s, and the national health insurance program began to operate in 1977. Since the democratization period of the late 1980s, major social security programs including the national pension and the employment insurance have been implemented. Until the mid-1990s, however, the social security system could be characterized as a combination of social insurance programs for such privileged groups as civil servants and core industrial workers in large firms, with very little public support for disadvantaged groups. It is generally believed that social welfare programs were introduced to bolster economic growth rather than to promote social rights and equality (Lee, 1999). 22

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Before democratization, the authoritarian governments had tried to ensure labor peace in order to promote rapid economic growth. They suppressed trade union movements and restricted collective bargaining practices. Instead, regular workers in large firms were provided with pay based on seniority, lifetime employment, protection from dismissal, mandatory severance pay guarantees and other supplementary benefits (Organization for Economic Cooperation and Development (OECD), 2000). Those workers benefited from the limited social security system as well. The distribution system was well suited to the Korean traditional family model. Given the strength of family ties and the low levels of women’s participation in the workforce at that time, the core workers usually supported their family members as the sole breadwinners. The distribution model, in which core workers were guaranteed employment protection and social security benefits, could be sustained for decades. The nearly full employment sustained by the rapidly expanding economy kept the distribution system working with no significant interruption. The publicly regulated system successfully managed to provide secondary education for almost everyone. Since the number of college graduates was also rising rapidly in the 1980s, the wage gap was reduced between workers with different skill levels (OECD, 2000). In addition, disruption to the family and working housewives’ were relatively rare. Most families shared the benefits of the economic growth through the secure employment of their male breadwinner. Since the democratization of 1987, the distribution system that protects core workers has become even more rigid. Trade unions have expanded to include mainly regular workers in large firms, while collective bargaining has been occurring at the level of the individual firm. Consequently, the strengthened bargaining power of the trade unions since the democratization has contributed to social protection for regular core workers (OECD, 2000). The economic crisis of 1997 was a turning point in Korea’s social development. The economic crisis led directly to a social crisis. It was immediately revealed that the existing social programs could not adequately respond to the soaring needs touched off by the crisis. The unemployment rate rocketed from 2.5% to a peak of 8.5% in early 1999. The existing social security system, which had been based on the condition of full employment, could not provide any help for the unemployed and their families. Those families were exposed to difficult economic conditions and severe deprivation with no social protection. Many jobless families fell into poverty, and the number of homeless people increased. Before long, broken families and abandoned children were attracting public attention. Responses of social welfare policy The public criticized the government’s neglect in creating a social safety net, and this censure was accelerated by the advocacy of civic organizations and trade unions. The new administration under President Kim Dae-Jung was willing to meet these urgent needs by way of a policy response. For the first time in Korea’s history, the government was making serious and rigorous endeavors in the social policy arena. Amid the mass unemployment, the employment insurance system turned out to be too limited in coverage and restricted in benefit eligibility to function as a social safety 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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net for the unemployed. In 1998, the Tripartite Commission, consisting of representatives of labor, business, government and public interests, agreed to expand the coverage of employment insurance faster than had been scheduled. For instance, although the employment insurance system was introduced in 1995 to firms with 30 or more employees, its coverage was expanded rapidly in 1998 to workers employed in all firms with at least one employee. The eligibility criterion for unemployment benefits was eased as well (Hwang, 2006). Given the still limited coverage of the employment insurance, however, other measures were required to alleviate the economic deprivation of jobless individuals and their families. Public work projects, financed by general revenue, created an average of about 400,000 temporary jobs per year in 1998 and 1999. The government also temporarily expanded the coverage of the existing public assistance program, known as the livelihood protection program. Some cash benefits were newly provided to low-income individuals of working age and their families for a limited period of time. Structural reform of social welfare policy These immediate policy responses to the social crisis were succeeded by more structural changes to the Korean social welfare system. Labor market reform took place right after the financial crisis. The government also started a structural reform of the social security system. Increasing employment flexibility has been an issue since the early 1990s. Employers have demanded a more flexible labor market for employment adjustment. In 1998 the Tripartite Commission decided to legalize for redundancy dismissal and employment adjustment for urgent managerial needs. In addition, the Dispatched Workers Act, which was passed into legislation, allowed for the establishment of temporary work agencies (OECD, 2000). However, the reforms resulted in strengthened labor market segmentation between regular core workers and peripheral contingent workers. It turned out that employment protection for regular workers remained largely intact despite the reforms, and remained at a level that was still higher than the OECD average. Employers have also hesitated to confront strong opposition from trade unions in large firms. Instead, they have chosen to employ more contingent workers for new job vacancies in order to avoid strong employment protection practices for regular workers. As a result, the number of contingent workers, over-represented by women, older or low-skilled workers, increased rapidly (OECD, 2000). The new administration sought to reform social welfare programs beyond meeting the immediate needs caused by the crisis. A dominant concern of the reform was equality and social solidarity. A major means to this end was the creation of universal social insurance programs like those in developed countries. One of the significant changes in the social welfare system was the rapid expansion of social insurance coverage. The legal coverage of all social insurance programs was expanded to encompass nearly the entire population by the early 2000s. The expansion of the national pension (NP), in particular, deserves attention. The NP was introduced in large firms in 1988. Until the mid-1990s, the NP covered only the relatively better off in urban cities, such as employees in firms 24


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with five or more workers, and a small population of residents in rural areas. The rest of the population, which consisted of employees in small firms and self-employed urban workers, was finally included in the compulsory coverage of the NP in 1999. An organizational change in the national health insurance system (NHI) was another significant structural reform of these days.1 The NHI were administered and financed by more than 350 medical insurance societies, which were broadly categorized into three different types by the status of the insured: 139 societies for employees, 227 societies for selfemployed workers and a society for government employees and school teachers. By 2000 these three kinds of associations were integrated in a central agency. Separate financial accounts for employees and self-employed workers were incorporated in 2003 (National Health Insurance Corporation, 2005). One of the key factors which made the integration possible was the activity of the progressive civic groups advocating social solidarity. In fact, this reform has prevented the differential treatment of the insured based on their occupational status and place of residence. By creating a single payer system, it has broadened the scale of risk pooling and, thus, has provided a chance to improve the benefit coverage of the health insurance. Yet this benefit was accompanied by financial irresponsibility on the side of the insured (Kwon, 2003). Another noteworthy change in the late 1990s could be found in the public assistance programs. The national basic livelihood security (NBLS) program, which replaced the livelihood protection program in 2000, reflected a new idea that citizens in need should be entitled to benefit from government as a social right.2 The eligibility was extended to all the poor, including able-bodied adults, although able-bodied adults must comply with work requirements in order to receive full cash benefits. Although this work-fare approach has been harshly criticized by progressives, the general public does not appear to oppose it. The cash benefit, combined with in-kind benefits and recipients’ earned incomes, should guarantee an income equal to the corresponding poverty line. The NBLS program is an entitlement program, meaning that the government cannot refuse to give benefits to eligible families for any reason, including budgetary conditions. This reformed public assistance was expected to supplement the universal social insurance system as a last resort. Emerging welfare state in Korea The expansion of the coverage of the social insurance programs, the integration of medical insurance societies in the NHI and the introduction of the NBLS together signify a new era in the development of Korean social welfare system. These efforts are 1

In 1977 the NHI scheme began to insure workers in large corporations with more than 500 employees. By 1989 the nation had achieved universal health insurance coverage, covering virtually all employees, employers and the self-employed. 2 The livelihood protection program, which was a public assistance program that was enacted in 1961, had strict eligibility criteria and low levels of benefit. Only families with no able-bodied adults were eligible for a small amount of cash and in-kind benefits. 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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Percentage of total GDP

12.0 Net public social expenditure

10.0

Net total social expenditure

8.0 6.0 4.0 2.0

03 20

20

02

01 20

00 20

99 19

8

7

19 9

6

19 9

5

19 9

19 9

4 19 9

3 19 9

2 19 9

91 19

19 9

0

0.0 Year

Figure 1 Net total social expenditure, 1990–2003 (% of GDP). Source: OECD (2007).

distinguished from those of the past in that they try to extend and secure social security benefits to disadvantaged groups previously excluded from or loosely protected by the system. It was often stated that the purpose of the social insurance reform was to achieve social solidarity based on a universalistic approach. Public assistance benefits have become a social right. In the past, social policy was considered as an auxiliary tool for assisting economic growth. It can be argued that social policy has come to serve its own distinctive purpose of social development. Thus, the Korean welfare state has emerged from the social crisis of the late 1990s. Social welfare reform since the late 1990s has been partly reflected in the trend in social expenditures. Figure 1 presents Korea’s net public social expenditures and net total social expenditures (as proportions of GDP) from 1990 to 2003.3 The figure shows that social expenditure rose steeply during the economic crisis, even though it had been rising gradually from the early 1990s. While total social expenditure comprised about 4.1% of GDP at that time and increased to around 5% by the mid-1990s, it skyrocketed to more than 10% right after the economic crisis before finally dropping to about 8% in the early 2000s.4 Public expenditure also shows a similar trend. 3 Social expenditure includes not only public expenditure controlled by governments but also mandatory and voluntary private expenditure. All the numbers and the graph shown above in the figure are based on net social expenditure, adjusted for the taxation of benefits and tax breaks for social purposes (OECD, 2007). 4 Part of the increase in social expenditure is accounted for by the rise in private social expenditure, especially during the economic crisis. The increase is not due to programs that have been newly introduced or expanded. The large share of private expenditure is explained by the increased amount of payments from mandatory retirement pay. For years, employers in Korea have been mandated to provide retirement pay to employees who leave their firms. Thus, the soaring unemployment of the economic crisis period automatically increased the amount of benefits from the retirement pay program.

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Social expenditure in Korea is much smaller than that of other OECD countries.5 However, Korea’s substantial increase is still noticeable. It needs to be mentioned that the change in social expenditure has only partly captured the social security expansion since the late 1990s. Most importantly, the expanded coverage of the NP will result in a higher level of social expenditure in coming decades. This is because the elderly will be provided with a full pension if they meet the 20-year contribution period. Many experts have debated on the characteristics of the social security expansion that took place during the late 1990s. It is maintained that recent social security development is distinguished from that of the past, since it shows increased state involvement in social welfare provision and aims at promoting social solidarity (Kim, 2002). The qualitative nature of the social security reform discussed earlier and the quantitative change in social expenditure seem consistent with this argument. In fact, the evidence suggests that Korean society has changed from being a developing state to a welfare state over the economic crisis (Kwon, 2002).

Social development since the social welfare reform The Korean economy has recovered quickly since the crisis. In 1999 GDP grew at 10.7%, while in 2000 the unemployment rate decreased to 4.1%. The government made rigorous efforts to expand social welfare policies. Despite these positive changes, the subsequent social development is not as positive as one’s might expect. Changing social environment Until recently Korea was considered to be an exemplary case in its successful combination of economic growth and equitable income distribution. In fact, income distribution improved over the period of economic expansion from the 1980s to the early 1990s (Ku, 2006). However, since the mid-1990s, and especially after the onset of the 1997 economic crisis, Korea has undergone a reverse trend, with economic growth stagnating and income differentials worsening. Table 1 presents trends in family income distribution since the early 1990s. The Gini coefficient of family income was around 0.27 at the beginning of the 1990s. It did not Table 1 Trends in family income distribution in Korea Year

1991

1996

2000

2003

2006

Gini coefficient p90 ⁄ p10 Relative poverty rate

0.27 3.54 9.38

0.28 3.48 8.97

0.34 4.29 13.33

0.34 5.39 16.29

0.33 5.41 16.62

Source: Adapted from Ku (2006) and Kang et al. (2006). Note: Relative poverty rate is the percentage of the population whose equivalent income is below 50% of the equivalent median income. 5

Some European countries like Sweden, France and Germany have atained the highest level of net total social expenditure, reaching more than 30% of GDP in 2003. Social expenditures in the USA, the UK and Japan are also over 20% (OECD, 2007). 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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change very much until the mid-1990s, and then it moved up steeply right after the economic crisis. After that, it moved down again as the economy recovered from the crisis. In 2000, however, the coefficient stayed at 0.34, which was at a much higher level than in the pre-crisis period. Since then it appears that the coefficient has continued to remain at a similar level. The disparity in income between people in high and low income brackets offers an even worse portrait of the trend in income inequality. Although the ratio of family income at the 90th percentile to that at the 10th percentile had hovered at around 3.5 before the crisis, it rose to 4.3 by 2000. The income ratio increased even further to about 5.4 in 2006. This widening income gap mainly reflects the declining position of low income families. That is to say, the percentage of the poor whose income was less than half of the median income soared from less than 9% to 13.3% over the crisis, and it eventually reached as high as 16.6 in 2006. The worsening economic conditions of low income families have been caused mainly by the deteriorating labor market position of low-skilled workers. Some critics have argued that the weakened position of low-skilled workers has resulted largely from government labor market reforms since the financial crisis. They maintain that the government left many low-skilled workers locked into insecure, low-paying jobs by legalizing redundancy dismissal and dispatched work. This criticism, however, is not consistent with an international comparison. In spite of these enactments, employment protection for regular workers in Korea was assessed to be the second strictest among the 27 OECD member countries analyzed, while employment protection for fixed-term and temporary workers was ranked as corresponding to the average among OECD countries (OECD, 2000). Certainly increased contingent work exacerbated the suffering of low-skilled workers. Yet, it is not clear what exactly causes the increase of causal work. Given the labor market duality, employers responded to the uncertain economic environment by adopting a new strategy to expand non-standard work. The new employment strategy could have become widespread due to a declining demand for low-skilled workers, which is often blamed on skill-biased technological changes and globalization since the 1990s. Under these circumstances, strict employment protection would have led to rising unemployment. Demographic changes have also not been favorable. The male breadwinner family model has been slowly losing ground. Women’s participation in the labor force has been gradually increasing. Divorce rates have also been increasing until recently. The elderly, whose number has been rapidly increasing, are more likely to reside in their independent households. These changes have collectively contributed to an increase of low-income families. All of these changes have undermined the old social model, where core male workers in secure employment positions once supported their families entirely on their own decent earnings.The worsening economic position of low-skilled workers has become especially worrying. Alleviating the adversity of low-skilled workers and their families requires concerted social efforts. A leading role has been assigned to social welfare policy. Indeed, the recent social welfare reform has been focused primarily on helping disadvantaged families. 28


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Participants in pension schemes (millions of individuals)

20.0 18.0 16.0 14.0 Participant Exempt from contribution

12.0 10.0 8.0 6.0 4.0 2.0 0.0 1998

1999

2000

2001

2002 Year

2003

2004

2005

Figure 2 Number of pension participants and persons exempt from contribution (in millions of individuals). Source: National Pension Corporation (2006).

Population unprotected by the social security system The inadequacy of the recent social security reform has partly contributed to the sufferings of low-income families since economic recovery. Many of the reform measures were aimed at achieving universal coverage of major social insurance programs. Yet a considerable number of low-income families are still left out of the social insurance system. Universal public pension programs have been mandated since 1999. As Figure 2 shows, the total number of insured persons jumped from 7.1 million in 1998 to 16.2 million in 1999. Since 2003 there have been more than 17 million insured persons. However, compliance rates for the pension system have been low among workers in insecure jobs and self-employed workers. In 1999, 5.5 million insured individuals, or nearly 34% of all participants, were temporarily exempted from the mandatory contribution by not declaring any income. Since 2002 about 27% of insured persons have been exempted from contributions, which explains the high number of de facto non-participants. Many of these individuals are not likely to receive pension benefits in their old age.6 The situation of other social insurance programs is not so different. For employment insurance, the share of insured workers among wage earners increased rapidly from 32% in 1997 to 50.5% in 2000. After that, the share stayed at around the same level until 2004 (Lee & Park, 2006). The number of workers effectively protected by the work injury insurance was estimated to be 45% of the total economically active population (Lee, Hur 6

Individually insured individuals in the NP include both income-earning workers and also nonincome earners. The non-income earners may include low-income earners as well as unemployed or temporary jobless people. They are considered to be participants but are under temporary exemption from mandatory contributions. The period under exemption is not counted as a contribution period when pension benefit eligibility and benefit amount are determined. Thus, those who are under exemption are at risk of losing benefit eligibility or receiving an inadequate benefits. 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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Table 2 Reasons for distrusting the national pension (% of respondents)

Contributing Not contributing Exempt from contributing Total

Cannot afford to contribute

Uncertain whether pension benefit will be received

Inadequate amount of benefit

19.6 46.0 44.5

41.0 27.9 25.6

38.2 24.0 27.8

38.7

30.0

29.4

Source: Adapted from Kim (2005).

& Kim, 2001). Even health insurance benefits were suspended for almost two million families who did not contribute for three months or more in 2005. The most important reason for the limited social insurance coverage is that many workers in insecure jobs are unable or unwilling to contribute a share of their current income in order to receive benefits further down the road. This is especially true for the NP. According to a survey administered by the National Pension Corporation, many individually insured individuals who were exempted from contributions or were not paying contributions reported that they could not afford to contribute, which is illustrated in more detail in Table 2. They earn a low and insecure income compared to workplacebased insured persons. Yet, the combined contribution rate for the NP has been 9% from 2005 on. If the contribution for the national health insurance is added to this, the rate rises to above 13% of earned income. While workplace-based insured workers pay half this rate, workers in small firms, non-regular workers and the self-employed are often required to pay the full contribution on their own. As the contribution rates are likely to increase over time, disadvantaged workers may face more serious financial burdens in the future. In addition, many workers reported that they were also very doubtful about whether they would receive pension benefits in their old age if they did contribute today. The financial imbalance of the NP and the risk of its long-term insolvency may cause their distrust. Many of them reported that they preferred a private pension, suggesting that a loose link between contributions and benefits may have decreased their willingness to pay contributions. Shortsightedness may also account for some contribution evasion. Also, some employers have not complied in order to save the financial costs of the employers’ contribution. Disadvantaged families excluded from social insurance have not gained much help from the reformed public assistance system. In fact, Korea has dramatically expanded its public assistance programs since the late 1990s. Spending on public assistance increased from 0.2% of GDP before 1997 to 0.8% in 2001. Most of the increase was caused by the introduction of the NBLS program. The number of cash-benefit recipients in the NBLS 30


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program was about 300,000 individuals during the mid-1990s and almost 1,500,000 in the early 2000s. Despite this improvement, NBLS recipients remain only about 3% of the entire population. This means that the program supports a little more than a third of the poor, estimated to be about 8% of the whole population in 2000. This situation has not changed until recently. It seems that the public has been concerned that public assistance may create unintended behavioral changes, like reduced work efforts. Thus, extending this type of cash assistance very broadly does not seem to be politically feasible at present. There have been separate public assistance programs for the elderly, the disabled and singleparent, low-income families. Yet, the number of recipients has been small and the benefit levels have been low,so many low-income families who are not NBLS recipients are virtually excluded from any social protection. Potential financial crisis of social insurance programs One of the most serious problems in the current social security system lies in the longterm fiscal vulnerability of major social insurance programs. The NP system has attracted the most serious attention in this regard. The pension is a defined benefit plan and is designed to be financially unbalanced due to its high benefit level compared to its low contribution rates. For individuals with 40 years of contribution, the benefit level was initially set at 70% of the lifetime average income when the pension was introduced in 1988. In 1998, it was reduced to 60%. Given the current contribution rate of 9%, participants with an average income are expected to receive a pension benefit of more than twice their total contribution. Consequently, an enormous amount of implicit pension debt has been generated everyday. A population that is aging very rapidly is playing a critical role in endangering the long-term financial sustainability of the Korean pension system. The old age dependency ratio, calculated by the population size of the elderly aged 65 or more, divided by the size of population between age of 15 and 64, was 10.1% in 2000. This number is expected to rise as high as 37.7% by 2030. In addition to the unprecedented aging of the population, the declining rate of economic growth is aggravating the long-term financial vulnerability of the system. The NP is financed on a funded basis. Currently it is accumulating a large amount of funding to be spent on future obligations because there are now only a very small number of beneficiaries. As the system matures and the number of pension beneficiaries increases, the accumulated reserve fund will most likely be exhausted by 2047. After that, the pension will be financed on a pay-as-you-go basis. Given the current benefit levels, required contribution rates would be 30% in 2050 and nearly 40% in 2070, which does not seem feasible (Ministry of Health and Welfare, 2006). Thus, it seems that the pension program supports the consumption of current generations at the expense of the consumption of future generations. The national health insurance is likely to face financial difficulty as well. Health expenditure stayed at around 4.4% from 1990 to 1998, and then reached 5.6% by 2004 (OECD, 2006). Income growth, expansion of the health insurance coverage and diffusion 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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of new technologies contributed to this increase, and population aging is expected to further increase this expenditure (Yoo et al., 2003). Currently there is a policy priority on reducing the high private share of health-care expenditure. The proportion of private payments in total health-care expenditure has decreased steadily, from 73% in 1987 to 54% in 1998 (Kwon, 2003). By 2003, the proportion decreased still further to 41.9%, which is still among the highest in the OECD member countries. This high private cost of healthcare expense has posed a serious financial barrier for low-income families. In 2005 the Korean government announced a new plan for improving access to health care. The plan sets the goal at reducing the proportion of private payments in health care to below 30% by 2008. One main approach is to extend the benefit coverage of the health insurance to a wide range of uncovered health-care services. While the plan is broadly supported, it is likely to result in a fiscal crisis without increasing contribution rates and ⁄ or implementing appropriate measures of cost containment. Given the considerably low level of contribution rates by international standards, it is essential to raise the rate to a certain degree. Yet tax increases are getting more difficult to attain and effective measures for cost control have not been introduced.

Lessons and future prospects Korea has made serious efforts to provide social protection for the entire population. A major means to achieve this end has been to extend traditional social insurance programs to match those in developed welfare states. Traditional social insurance is universal in that it covers almost the entire population and provides generous benefits. The minority not covered would be protected by the reformed public assistance scheme. The reform efforts produced some positive results but were not greatly successful. In a changing environment, a social welfare system based on universal social insurance may be too expensive to sustain and not very effective in protecting disadvantaged families. Yet, the reform experience has also suggested some useful lessons and has pointed to some future prospects. First, while a dominant concern in the reform was on equality and social solidarity, more attention is now being paid to expenditure control and efficiency. The Korean experience suggests that in order to recover fiscal balance, social insurance programs may need to be more modest than those in Western countries. The most serious case is that of the public pension system. A substantial reduction of replacement rates would be required to improve the fiscal sustainability of the pension system. The current replacement rate is known to be high by international standards (World Bank, 2000). Scaling back the benefit formula would help to improve fiscal viability. This lowered benefit would lead to income insecurity and poverty of the elderly population, with no other significant changes. One option to lessen this problem is to add a defined contribution plan to the downsized NP. This would help to make the pension financially sustainable, since a defined contribution plan is neutral in terms of intergenerational redistribution. In addition, an investment-based defined contribution plan may 32


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produce higher benefits than a defined benefit plan, since the return rates of investment are likely to be higher than the rate of earnings growth in the coming era of population aging and lowered earnings growth (Feldstein, 2005). Health insurance is at risk of facing a fiscal crisis. As the current health-care reform increases the generosity of benefit coverage, medical expenditure will increase as well. Providers are inclined to supply more care because insurers pay more to those who provide more services. Thus, many experts have argued for a reform of the payment system to contain health-care costs. Introducing competition at the provider level needs to be considered as well (Cutler, 2002). Since the current health-care reform lowers the price of medical care, it will increase consumer demand. If there is increased demand, a regulated payment system limiting the supply of services cannot be sustained. For long-run cost containment, some reforms at the patient level will be unavoidable. Introducing deductibles or increasing co-insurance rates for a certain amount of medical expenditure may be examples. An extended benefit coverage combined with a proper level of a maximum out-of-pocket payment amount would still provide a protection against catastrophic medical expenses (Cutler, 2002; Cutler & Zeckhauser, 1999). Second, an innovative approach may be necessary to extend social insurance coverage to disadvantaged families. For workers in non-secure employment as well as for the selfemployed, the expansion of coverage ultimately depends on the participants’ willingness to contribute, given the limited administrative capacity to make accurate income assessments. Korea has adopted a top-down approach in which the government applies existing schemes that are designed for core workers in secure employment to disadvantaged workers (van Ginneken, 1999). Yet, this method of coverage extension has not received a high degree of support from non-participants. There may be several ways to encourage voluntary participation among disadvantaged workers. Recovering fiscal health may be essential for gaining their trust. Broadening their range of choice and control will be necessary as well. Improving management and governance of public funds and introducing a defined contribution plan and privately managed funds may help. Above all, social insurance schemes should be affordable to disadvantaged families by avoiding increases in contribution rates and by subsidizing low-income families. Third, more emphasis will be placed on targeted benefits rather than on universal programs to support unprotected low-income families. Social insurance may not function as effective a means for helping low-income families as in Western countries. A traditional public assistance scheme like the NBLS only covers the extremely poor among them. New targeted programs should thus be more rigorously expanded to low-income families. For the able-bodied low-income families, an available option may be the creation of a ‘‘making work pay’’ policy. While the introduction of the Earned Income Tax Credit and minimum wage increases may raise earned income, medical aid and housing subsidies may lower consumption expenditures. Educational support for low-income children is increasingly important. Child care and long-term care for the elderly and disabled may increase work opportunities and reduce work expenditures. 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

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The highest priority is being placed on providing social protection for low-income elderly and disabled people. A cash benefit program, which is targeted at low-income elderly people more broadly defined than in the NBLS, is likely to be introduced in 2008. Finally, a reduced role of income support is being supplemented by expanded employment support that boosts employment through active labor market measures and social services. While the recent reform focused largely on extending the coverage of income support programs, an emerging trend is to increase social service provision to support employment. Experiences of Western countries also show that this passive income support model is no longer a viable option in a changing labor market and family environment (Esping-Andersen, 1999). The government subsidy for child care is rapidly rising and social insurance for long-term care for the elderly is to be introduced, possibly as early as 2008. Some would prefer the public provision of social services, since this provides opportunities for secure employment. Given the budget constraints, however, this option does not seem to be feasible. An alternative may be to invest extensively in the human capital of a low-income population. Skill upgrading may be a more realistic way to provide decent wages in secure jobs for low-income families. The experiences of Korea during its industrialization era show that well-educated human resources can boost economic growth and achieve equal income distribution simultaneously. The future of the Korean welfare state may hinge on whether these social investment efforts will achieve success. It is hoped that one day, everybody will have equal opportunities to develop their human potential and will be able to achieve a decent standard of living.

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