Chapter 1 Introduction
1.1 Background and Motive
Chapter 1 Introduction
The study explores how the role and function of commercial insurance can be maximized in Taiwan’s labor insurance, labor pension, and national pension systems.
Because the general public is unable to be totally dependent on the country’s current labor insurance and labor pension, the coverage from the national pension system is inadequate in meeting retirement needs. Consequently, related commercial products have been introduced into the market to fill this gap. According to the statistics on life insurance from Life Insurance Association of the Republic of China, the premium payments for life insurance policies from January to March 2014 reached 651,783 (in NT$ million), increasing by 12.1% from 581,477 (in NT$ million) last year. From this latest information, we can see that the trend leans towards high demand for commercial insurance. The following is a description of the background and motivation of the study as well as its purposes and arrangement of chapters.
1.1 Background and Motive
As today’s demographic structure begins aging; many people opt for early retirement, the average lifespan lengthens, and there are more risks to long life, Taiwan’s citizens have started prioritizing relevant financial planning and insurance concepts as well as retirement planning. Based on statistical data provided by Ministry of the Interior, the dependency ratio between dependents (0 -14 years old and over 65 years old) and working population (15 – 64 years old) is 34.7%. The dependency ratio for the elderly is 15.0% and steadily growing. In addition, from 1993, when society began aging, the percentage people over 65 years of age account for is constantly going up; it reached 11.2% by the end of 2012. Lin Mao Chang (2012) pointed out that, according to the population demographic model, it was in 1974 that Taiwan diagram looked very much like a pyramid. By 2050, old people will
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be a social majority; the figure for people over 65 is likely to be 38% of the total population, according to the Council for Economic Planning and Development, which is why elderly-related economic burdens will be much heavier. Moreover, according to the Directorate General of Budget, Accounting, and Statistics of the Executive Yuan, the average retirement age in 2012 is 57.3, later than 2.5 years compared to the data published seven years ago. FINLEA survey information indicates that many people plan to retire by 61, four years later than the current average retirement age, hence the trends of aging, late retirement age, and active retirement. According to the data from Ministry of the Interior, the average lifespan of both genders in Taiwan is 79.51; 76.43 years for men and 82.82 years for women. Basically, people have more than 20 years of retirement life to look forward to; how to prepare for retirement early enough becomes a major issue.
As for Taiwan’s major national policy for retirement planning, aside from the regular labor pension system, there is also labor insurance and national pension. The development of labor insurance, the Bureau of Labor Insurance of the Ministry of Labor pointed out that when Taiwan started implementation of labor insurances in 1950, the coverage included injury, disability, maternity, death, old age, and five forms of retirement payments, as well as various payments paid out on term based on actual needs.
The labor insurance system went through several amendments including starting hospitalization benefits in July 1956, adding the “unemployment benefits” to the Labor Insurance Act in 1968, and adding the ordinary illness subsidy in the third amendment to the Labor Insurance Act in 1979. As a result, the benefits were then renamed into seven types of maternity, injury, medical treatment, disability, unemployment, old age, and death. In 1988, a fourth amendment was made to add medical care benefits. In July 1, 1998, in answer to the needs of an aging society and
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to protect the employment security of senior citizens, the government asked senior citizens who had already collected pension but started working again to enroll themselves voluntarily in occupational hazard insurance. To ensure the employment security of older people, the government started unemployment benefits from labor insurance on January 1, 1999. The recent years have seen amendments to parts of the Labor Insurance Act enacted by the Legislative Yuan in 2008. Furthermore, after the labor insurance pension was implemented in 2009, aside from the “incapacity benefits” which were renamed “disability benefits,” more ways to get monthly pension for disability, old age, and death were added in the form of pension, disability pension, and survivor pension1.
Labor insurance is to provide security for all employed workers. If the labor insurance premium were maintained at its present rates and the number of people receiving pension payments would form an inverted trapezoid signifying a cumulative rise, the fact that revenues are not enough will be a real challenge. Furthermore, labor insurance has had its share of financial crises, including large pensions paid out since the launch of labor insurance in 1950. Large payments were also made in 2006; labor insurance fund shrank from NT$400 billion to less than NT$200 billion within the year. The situation only eased up after amendments were made to the regulations. In recent years, the news that the labor insurance fund is once more at the brink of bankruptcy has incited public unease and panic, causing a serious bank run (Huang, 2010). This signifies that relevant labor insurance system is a volatile factor that causes unrest among the general public.
In addition, the formal enactment of the national pension insurance in 2008 is one of the major social insurance policies of Taiwan in recent years. Its main targets
1 Source: Introduction of labor insurance—Bureau of Labor Insurance, Ministry of Labor http://www.bli.gov.tw/default.aspx
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are people from 25 – 65, belonging to a registered household and are not enrolled in labor insurance, agricultural insurance, civil service insurance, and military insurance.
The National Pension primarily includes senior citizen pension, disability pension, survivor pension, and two forms of one-time payment: maternity and funeral payments. Because many people do not fully understand the pension system, especially the national pension, the majority of the citizenry takes a resistant attitude and refuses to pay the premium.
In addition, there was a complaint from a person whose relative passed away before becoming age-qualified (over 65).Therefore, he was not able to get any funeral payment, which is the root of the dispute behind after paying over NT$40,000 of national pension premium and being not able to benefit from it. Furthermore, funeral payments are restricted to the death of the insured and the survivor annuities is only paid to a non-working spouse with at least 55 years of age, or children below 25 years of age and have no earning capacity. Consequently, family members who do not qualify within the abovementioned scope are unable to collect the relevant amount.
In addition, Dai Chao-yang, Hsieh Pang-chang, Yang Ya-huei, and Chou Lin-yi et al (2010) conducted a survey analysis on the reasons behind the non-payment of national pension premiums and found that the primary reasons include non-understanding of the national pension system, not knowing if eligible for national pension, and poor family economic situation. The Financial Supervisory Commission (FSC) has expressed that, because the various economic security issues of the elderly arising from an aging society, mainly including deteriorating physical conditions, expected increase in medical expenses, and nursing care expenses due to accidents or illnesses, the general public usually use various forms of pension insurance and long-term care insurance to fill the gap. Among these, pension insurance can fill the gap created by inadequate pension payments (i.e. labor pension, national pension,
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etc.). By purchasing pension insurance at a young age and deferring pension payments during the accumulation period, people are able to receive annual pension payments up to the end of their lives, allowing them to have better quality of life during retirement.
According to the Minimum Standards for Social Security (Convention no. 102), passed by the International Labor Organization (ILO) in 1952, it states that for medical, sickness, unemployment, old age, maternity, and survivor’s benefits, the State may instate insurance policies to ensure a social safety net where the elderly is cared for, the sick treated, occupational injuries compensated, the unemployed subsidized, and mothers cared for. In addition, Chapter 11 of the Convention states that the standards for payment of those who enroll in old-age annuity of social insurance cannot be less than 40% of the income replacement rate. The balance should come from insurance pension and pre-retirement savings so pre-retirement financial planning is important.
Moreover, in 2005, the World Bank presented the five-pillar concept, which is mainly a concept for a multi-level pension system. At the same time, in terms of targets, aside from workers of formally declared units in 1994, the security of Lifetime Poor and the informal sectors were added. The five pillars are as follows:
Zero Pillar refers to national subsidy or social pension, which is mainly to provide the security of minimum living standards for all old people; the First Pillar, which is the
“compulsory” social insurance system, with premiums from social insurance being the main financial source, it is financed on a pay-as-you-go basis. Its most important feature is to be able to transfer income for providing minimum living standards for the elderly through the redistribution function of joint social liability; the Second Pillar is the “arbitrariness” of the employee pension system, which may include occupational pension or personal pension plans. Its main feature is the escrow handling operations
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of a defined contribution system; the Third Pillar is a personal commercial insurance savings system that is entirely “voluntary. Whether it is occupational pension system or personal pension plans, the system is a voluntary defined benefit or defined contribution system, the goal of which is to guarantee a clear retirement goal; and the Fourth Pillar, which is the moral family support system. This level of security provides care for non-working members of the family in their twilight years. This considers that the financial source of some retirees may be their offspring, home ownership, family transfer, or personal savings. This shows that the international community does have a set of regulations for elderly retirement security. Personal pension insurance has become a major part of every nation’s pension system; it has also resulted in the rapid development of pension insurance.
Professor Fu Tsung-hsi from National Taiwan University’s Department of Social Works pointed out that in the Three Pillar system presented by the World Bank in 1994, the defined Second Pillar contribution system of private business is considered the core, complemented by the taxes of the First Pillar and the private pension of the Third Pillar. In addition, the Five Pillars presented by the World Bank are as follows:
1. non-contributory pension that provides a minimal level of protection; 2. First level is contributory pension which provides related payments; 3. Second level is mandatory individual savings account; 4. Third level is voluntary retirement program;
and 5. Fourth level is the informal intra-family or intergenerational resources. In summary, the major development trends within countries around the world in recent years are as follows:
1. Building multi-level pension: common trend among nations
2. Encourage the development of private pension: common trend among nations 3. Cutting back of all relevant pension: common trend among nations
4. Reinforce prevention of risk of poverty: England, Germany, and South Korea
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Furthermore, Cheng Wei-hsiang (2008) pointed out that during the 18th century when the Industrial Revolution started in Western countries, labor problems hand in hand with economic transformation. Solutions including labors helping themselves by forming various organizational groups or becoming united to fight with employers, government enacting laws or drafting policies for intervention gradually became the methods for solving various forms of labor problems. It wasn’t until 1919 that the first international labor organization was established; the International Labor Organization (ILO) is the international organization within the United Nations tasked with handling labor issues. The preamble of the ILO Charter and Universal Declaration of Human Rights exhorts the international community to provide comprehensive protection for the elderly and to study long-term considerations. Focusing on protection of the aged and social security, Conventions No. 102 and 128 also pointed out that the foundations of social insurance are built on the insurance premiums of employee and employer; countries may or may not intervene. However, the regular basic protection is based on the country’s tax revenues, which should be provided to the citizenry. This is the major international interpretation of labor issues. As for relevant domestic developments, the economic security guarantee system for the elderly presented by the Steering Committee for Pension System Reform of the Executive Yuan (2012) studied multi-level pyramidal structure developed internationally, in which the zero level is social assistance, the first level is public pension, the second level is statutory occupational pension, and the third level is commercial pension, as shown in Figure 1.
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Figure 1 Schematic Diagram of Taiwan’s Multi-level Security Insurance System for the Aging Economy
Source: Steering Committee for Pension System Reform of the Executive Yuan (2012), compiled by the study
In addition, Wang Li-rong, Hseuh Cheng-tai, Hsin Pin-long, Wu Chyun Yen (2013) and Lin Shi Chyun (2013) pointed out that since 1993, the International Labor Organization (ILO) has been working on a variety of issues concerning the elderly and social protection, mainly emphasizing on the alleviation of poverty and provision of low-risk pension. Each nation needs to develop a multi-level support system for the elderly and maintain a flexible structure. Moreover, by utilizing diverse financing sources, the entire system can achieve decentralization of fiscal risk, ensuring long-term stable results. The four levels of the structure for elderly economic security presented by the ILO are as follows:
1. The major function of the first level is to alleviate poverty; the government is more deeply involved and the major financial source is taxes. The goal is achieving minimum living standards.
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2. The second level is mandatory occupational pension, which is the support system of mandatory public management; income replacement rate is between 40% and 50%; financial system is pay-as-you-go. The goal is redistribution and using the coinsurance.
3. The third level is the mandatory personal account system, which is mainly to supplement the two above-mentioned forms of protection. It is considered a mandatory occupational pension plan, with hopes of ensuring compulsory savings and coinsurance.
4. The fourth level is a voluntary personal account system, which is primarily a personal savings plan using a voluntary pension savings or non-pension plan.
This encourages an individual to achieve his saving goals; its function is to provide extra economic security for the elderly.
Furthermore, Article 35 of the Labor Pension Code states that business units employing more than 200 people should enroll employees who have expressed written willingness to enroll in pension insurance in a pension insurance program that is in line with the provisions of the Insurance Act, with the union’s consent or agreement through arbitration for those with no unions. For the foresaid workers who select annuity insurance, the employer shall not follow Paragraph 1 of Article 6 to contribute the labor pension for them. The central competent authority should prescribe the first annuity payments, approval, and other compliance regulations.
Business units adopting the provisions of the preceding item should submit this for approval of the central competent authority. The average yield of the first annuity should not be lower than the standards of Article 23. In response to this, the Ministry of Labor once proposed that labors choose investment plans on their own and formed a retirement investment plan ad hoc group. Under the new pension system, workers
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may voluntarily pay about 6% of their monthly salaries to their pension account, the amount of which is tax deductible. So far, there are more than 330,000 workers in this voluntary contribution program, with an average contribution rate of 5.3%. At the same time, some workers choose to invest in mutual funds. The Ministry of Labor is considering using self-selected investment schemes to guide workers into saving for retirement earlier. In the self-selected investment program, workers can choose the guaranteed or non-guaranteed products offered by reputable financial institutions, including local and international mutual funds, trust products, and insurance policies.
The government will also draft a criteria for financial institutions qualified to become involved in the investment platform, including capital limitations, financial solvency, risk control mechanism, asset management professionals and experience as well as record of major irregularity; only reputable financial institutions will be allowed to participate. Currently, the initial plan of the Council of Labor Affairs is to partly open up the employee voluntary pension contribution system. However, one of the major directions for the enactment of laws will be whether companies with more than 200 employees will be allowed to directly go to the platform and carry out retirement pension planning. As Fu Tsung-hsi et al (2012) expressed, aside from the workers’
negative response toward voluntary contribution, compared to their Western counterparts, Taiwanese companies still have a long way to go in planning pension system on their own. For example, pension reform in Germany had the government offer tax breaks for corporate pension. If the employer pays the premium for corporate pension, then payments are not counted as taxable income; the company can enjoy unlimited tax breaks. If the employees pay from their salaries, they get a monthly tax break of 220 Euros. Currently, under the new pension system, aside from the personal account system, pension insurance is also mandatory; this has the implications of private pension. The crux behind why it is not executable is in that the guaranteed
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income is shoulder by the insurance companies, affecting their willingness to participate. In addition, this system dictates that companies with more than 200 employees may enroll them in pension insurance products in keeping with the Insurance Act, with the consent from the unions. In this type of pension insurance, the employer serves as the policyholder, who deducts at least 6% of the employee’s salary monthly as contribution. The major considerations for government are how to assist SMEs in establishing a similar corporate pension system and how to establish the relevant tax breaks and incentives for companies who set up their own pension plan to build a strong and healthy corporate pension culture in Taiwan.
In summary, because of the inadequacies of the labor insurance, labor pension, and national insurance systems and due to unfamiliarity with relevant systems, the general public is usually insecure and distrustful of the country’s policies or social welfare systems. A 2012 labor insurance report indicating that the fund may be facing bankruptcy incited panic and led to a run in both labor insurance and labor pension.
This resulted in workers withdrawing hundreds of billions of NT dollars in a matter of
This resulted in workers withdrawing hundreds of billions of NT dollars in a matter of