Labor and national pension insurance rates rise by 0.5 percentage point

  • Date: 2017-01-05

I. Background

Taiwan’s pension system includes five separate social insurance programs that cover public servants and teachers, laborers, military personnel, farmers, and a “national” pension insurance program for those not covered by the four employment-based categories.

For laborers, the labor insurance program provides retirement protection, and the national pension program ensures that elderly citizens with no employment-based retirement benefits will still have the basic economic necessities in their golden years. To ensure the sound financial status and sustainable development of the labor insurance and national pension funds, beginning on January 1, 2017, the government raised both the ordinary insurance premium rate for labor insurance and the national pension premium rate by 0.5 percentage point (pp). The newly adjusted labor pension premium rate is 10.5 percent (which includes the 1 percent employment insurance premium), and results in additional monthly payments per employee of not more than NT$46 (US$1.44) by the insured, NT$161 (NT$5.03) by the employer, and NT$23 (US$0.72) by the government. This is expected to add NT$18.3 billion (US$571.70 million) annually to the labor insurance funds.

The monthly premium for the national pension program was increased from 8 percent to 8.5 percent, resulting in an additional NT$54 (US$1.69) monthly payment for the ordinary insured; other beneficiaries (not including low-income household members and people with serious disabilities) are now paying an additional NT$27 (US$0.84) to NT$41 (US$1.28) per month, with the government also increasing monthly premium subsidies by NT$37 (US$1.16) to NT$91 (US$2.84) per person. This rise in the monthly premium will increase national pension revenues by NT$2.1 billion (US$65.60 million) annually.

 

II. Premiums raised based on existing law, not newly enacted measures

The labor insurance program’s ordinary insurance premium was raised by 0.5 pp pursuant to Article 13 of the Labor Insurance Act, which was already in force when the labor insurance pension system was instituted in July of 2008. This increase will hopefully ensure that retired laborers will have sufficient funds to maintain a reasonable lifestyle. The yearly accrual rate for pension benefits was also set at 1.55 percent [i.e., the monthly pension benefit will be 1.55 percent of the average monthly insured salary multiplied by the number of years of service].

When pension benefits increase, however, premiums rise accordingly. The government has thus adopted a gradual premium rate adjustment mechanism that would raise the rate from 7.5 percent to the ceiling of 13 percent (including employment premium rate of 1 percent) in small increments over a period of 19 years. This method will balance the need for sufficient labor insurance financing with the financial burden on employers and employees. The ordinary premium rate has been raised by 0.5 pp every year from 2011 to 2015. In the coming years, the rate will be raised by 0.5 pp every two years until 2027, with the ceiling set at 13 percent.

The national pension program will also adopt an incremental premium rate adjustment system to ensure long-term financial health. Pursuant to Article 10 of the National Pension Act and Article 10 of that act’s Enforcement Rules, the national pension premium rate was originally 6.5 percent in the first year, and was to be raised by 0.5 pp every two years until it reached the upper limit of 12 percent. When the balance of funds in the nation’s pension program are sufficient to pay out benefits for the following 20 years, the premium rate shall not be increased.

The most recent actuarial report released last September showed that as of the evaluation date the program, nine years into operation, had insufficient funds to make payouts for the next 20 years. The government therefore announced it would raise the premium rate by 0.5 pp starting from January 1, 2017.

 

III. Premium adjustments ensure sound finances and sustainability

Taiwan’s labor insurance program is a social insurance system based on joint fee payments and shared risk. The government, employers and employees jointly share responsibility for premium payments to fund program payouts. So when program payouts are higher, program income must increase to maintain a financial balance.

The current premium rate mechanism, giving due consideration to the public’s ability to pay, is the result of discussions involving numerous stakeholders. In fact, rates have been lower than the program actually requires. If premiums are not adjusted pursuant to law, program deficits from this generation will be passed on to the next generation. This would seriously undermine pension system sustainability, and thus endanger the financial safety net for many workers.

The national pension system is likewise a social insurance program, and should also operate on the principle of financial self-sufficiency. Its primary funding source is premiums paid by the insured, central and local governments. However, the program’s 8 percent premium rate in 2016 was far lower than the most actuarially sound rate of 20.10 percent. The government must therefore raise the premium rate, as stipulated by law, so that the system will be financially sound and uphold the spirit of generational equity.

 

IV. Government premium subsidies for the disadvantaged

The national pension program serves citizens ineligible for any employment-based social insurance programs to give them basic financial protection in old age. Under this program, however, many of the insured are financially disadvantaged members of society, including homemakers and the unemployed, so the government lends a helping hand by subsidizing at least 40 percent of their insurance premiums, and up to 100 percent for low-income households and the severely mentally or physically challenged.

A. Full premium subsidies for low-income households

The government subsidizes insurance premiums for all members of low-income households in full, so premium adjustments do not increase their financial burden, and they still enjoy full future pension benefit rights.

B. Premium subsidies adjusted depending on degree of disability

The government subsidizes 55 percent, 70 percent and 100 percent of premiums, respectively, for citizens with mild, moderate and severe disabilities.

C. Pro-rated government premium subsidies for low-income beneficiaries

Beneficiaries with relatively low household incomes and the financially disadvantaged are eligible to apply for higher subsidies at local special municipality or county governments, or township, city and district offices. If their applications are approved, the government raises the subsidies to cover 55 percent or 70 percent of premiums.

D. Premium payment installment plans or extensions available for those facing temporary economic difficulties

Insured citizens that are temporarily unable to pay premiums in full may apply to the Bureau of Labor Insurance to make payments, with interest, under an installment plan or extension, or, depending on their financial status, pay in installments over a 10-year period.

 

V. Conclusion

Labor insurance pension policy is important because it alleviates legitimate concerns of hard-working laborers and ensures they can enjoy guaranteed retirement benefits as long as they live. The national pension system closed previous gaps in Taiwan’s social insurance system to create a more comprehensive safety net for one and all. As the costs of operating annuity-based pension programs are far higher than programs of lump sum payouts, reasonable premium rates are required to ensure the financial health of pension funds so that pension systems are sustainable and uphold the spirit of generational equity.