Chapter 2 Literature Review
2.1 Labor Insurance and Labor Pension Systems
Risk among the elderly is more predictable than for the general public. If accidental death does not occur, then each employee will enter the phase of old age.
Due to the frailty of aging, most labors are unable to competently fulfill their original job responsibilities, and therefore unable to rely on employment for their basic living.
Therefore, pension from a labor insurance system is a protection against the risk of aging. In particular, it enables retired workers to maintain their original living standard or plan for a basic standard of living. The core value of the system is the mutually beneficial function of premium payments from wages or contracts to ensure financial security of retired workers.
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Huang, Chi-Ying (2008) defines labor insurance as mandatory life insurance formulated by the government as an implementation of social policies. To ensure the financial security of labors, the government targets labors and assembles individuals most likely to encounter the same risks, and establishes a common interest group.
Using coercive measures and insurance technology, when the insured incurs injury or loss as a result of an accident, the damage is dispersed throughout the entire establishment to compensate the injured and his family. The insured is obligated to pay premiums in order to enjoy the right to compensation, and the purpose is to ensure that workers have a basic income safety net. "
In Taiwan, in addition to labor insurance, other major social insurances include labor insurance, civil service insurance, farmer’s insurance and national health insurance, as listed in Table 1.
Table 1 Development of Social Insurance
Payments include maternity, injury and illness, disability, old age and death. Claims for disability, old age and death benefits also include an additional monthly pension, namely the Old-Age Pension, Disability Pension, and Survivor Pension. (Source:
Bureau of Labor Insurance, Ministry of Labor) 1958 Civil service
insurance
1. Authorized full-time employees.
2. Full-time public school teachers.
3. Full-time teachers in authorized private schools
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Time Insurance category
Target
registered as judicial person in accordance with the Private School Act and approved by competent Farmer’s Association Act, agricultural workers aged 15 or above are eligible for the insurance.
1995 National health
Primarily for citizens aged 25 or more and less than 65, and who have no labor, farmer, civil service or military insurances.
Source: Bureau of Labor Insurance, Ministry of Labor
(http://www.bli.gov.tw/sub.aspx?a=q58UpWBe19E%3D) , as summarized in this study.
The Bureau of Labor Insurance, Ministry of Labor (2011) pointed out that in 1950, Taiwan’s labor insurance began to be carried out on the basis of the single Article, Taiwan Labor Insurance Program, and other enforcement rules. Through amendments over the years and the third reading at the Legislative Yuan on July 17, 2008, the Executive Yuan finally order the enactment of the Labor Pension Program on January 1, 2009. The original labor insurance included payments such as maternity, injury and illness, disability, old age and death, but after the Labor Pension was implemented, Handicap Benefits was renamed Disability Benefits, and disability, old age and death benefits also include an additional monthly pension, namely the Old Age Pension, Disability Pension, and Survivor Pension. Among these benefits, the old-age benefit is divided into three items: (1) Old-age annuity; (2) Old-age pension
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fixed- sum payment, and (3) Old-age pension lump sum payment. An one-time application was only available to those who were insured and qualified for benefits prior to December 31, 2008, and those who are insured after the implementation of the Labor Pension Program in January 1, 2009 are not permitted to choose a lump sum payment. (Source: Bureau of Labor Insurance, Ministry of Labor)
In summary, the main purpose of "labor insurance" is to protect workers from losses in the event of all kinds of accidents. Generally, most countries prioritize labor insurance because labors make up the largest population in industrial countries, and labor issues are relatively complex, resulting in complex and severe influences. As such, countries usually rely on labor insurance to resolve many labor related issues.
In her study, Huang, Chi-Ying (2008) noted that because labor insurance is a form of social insurance, it differs from general insurance, and are characterized by the following features:
1. Mandatory Principle: All labors above the age of 15 and below the age of 65 must be insured by the Labor Insurance through their employee, affiliation or organization.
2. Societal Principle: Social is a type of government assistance to ensure the livelihood security of the social majority through means such as social policy and confining social dangers. Labor insurance is a way for a nation to implement social security policies. Without social security as the highest principle, labor insurance losses its fundamental value. In addition, its associated social responsibility of providing assistance is primarily fulfilled through helping others and re-distributing income to ensure livelihood security.
3. Legal principles: Labor insurance comprises specific policy objectives. To fulfill the constitutional rights of the people, all matters pertaining to the rights and obligations of the people should be clearly defined and legally prescribed,
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including the effective dates of the insurance, its interruption, termination, coverage and compensation. Even for authorized supplementary underwriting, the authorization should be specific and apparent to the insured. The enforcing agency must comply with the legislative intent and perimeters of the parent law.
Details and technical issues are regulated by enforcement rules, and the content must not contravene the parent law or add non-existent limitation to the people’s right to freedom.
As shown below, labor pension payment is calculated according to individual circumstances. Those who were insured prior to the end of 2008 can select payment method that is most appropriate for them. (Source: Bureau of Labor insurance, Ministry of Labor)
1. Old-age Pension Annuity: Based on the following two preferences:
(1) Average monthly insured salary × number of years ×0.775%+ NT$3,000.
(2) Average monthly insured salary × number of years ×1.55%.
The average monthly insured salary is calculated based on a maximum 60-month average of salary during the insurance period; or for those who have been insured for less than 1 year, calculated based on the actual number of months insured; or for those insured less than 30 days, calculated based on 1 month.
2. Old-age pension fixed- sum disbursement (only those who were insured prior to December 31, 2008 are eligible for this disbursement method):
Disbursement amount= Average monthly insured salary × number of disbursement months
The average monthly insured salary is calculated based on a maximum 60-month average of salary during the insurance period; for those who have been insured for less than 5 years, calculated based on the actual number of months of average salary;
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for every insured year, one month of average monthly insured salary is disbursed; for those insured less than 1 year, calculated based on actual number of insured months;
for those insured less than 30 days, calculated based on 1 month; or for those insured after age 60, calculated up to a maximum of 5 years.
3. Old-age pension lump sum disbursement：
Disbursement amount = Average monthly insured salary × number of disbursement months
The average monthly insured salary is calculated based on actual average insured salary for the 3-year insurance period prior to insurance cancellation. For those who have been insured for less than 3 years, it is calculated based on the actual number of months of average salary during the insured period. For every insured year, one month of average monthly insured salary is disbursed; for those insured for more than 15 years, two months of average insured salary is disbursed per excess year, with a maximum of 45 months. For those still employed after age 60, the number of insured years is calculated to a maximum of 5 years, and combined with the pension from before age 60 into the lump sum payment, totaling a maximum of 50 months. In addition, those insured less than 1 year are calculated based on actual number of insured months, and for those insured less than 30 days, calculated based on one month.
In addition to the labor insurance, the labor pension is also an old-age pension social system (referred to as labor pension). Basically, the pension system disbursement is different, and can be divided into defined benefit plan and defined contribution plan. However, defined contribution plan from individual accounts has gradually become the main pension trend in global development. The development of Taiwan’s labor pension system over the last few years can be divided into the old pension system and new pension system, as described below.
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1. Old pension system: The main problems in this pension system are: (1) In Article 57, calculation for the number of years of works is based on the principle of the same industry or company, leading to frequent dispute when combining the actual total number of years worked; (2) Theoretically, employees must remain with the same employer for at least 15 years to be eligible for pension from the employer, thereby seriously affecting job change decisions, and hence a covert threat to worker’s rights; (3) Resignation from a job means the loss of pension years, and new pension years must be recalculated, thereby threatening financial security during old-age. In Taiwan, job change is a frequent occurrence, but our pension law is based on Japan’s “lifetime employment” pension system, and therefore inconsistent with Taiwan’s reality. Moreover, the lifespan of small and medium enterprises are typically shorter, and employees are threatened with job loss as a result of business collapse due to employer mismanagement or intentional collapse to avoid paying for costly employee pension, or severance; and (4) Employers contribute the required minimum 2% into employee pension reserve fund, resulting in slow growth of the fund. Consequently, the law was amended to formulate the new pension system.
2. New labor pension system: After many years of discussions, Taiwan passed the Labor Pension Act in June 2004 after three readings. This Act is a special provision for labor pension, and therefore has priority application in the Labor Standards Acts. Funding for the new labor pension system comes from: monthly employer contribution to the pension (minimum contribution is 6% of labor monthly wage), voluntary employee contribution (within 6% of monthly wage), return from pension fund, late fines and other income. Mandatory employer contributions and voluntary employee contributions are accumulated into the
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personal accounts of employees, and are not affected by job change, position loss or business closing.
The new pension system operates primarily through the Individual Retirement Account, and supplemented by Annuity Insurance. In the Individual Retirement Account, employers are required to contribute an amount no less than 6% of the employee’s monthly wage toward the pension of workers defined by the Labor Standards Act (including nationals, foreign spouses, and spouses from China, Hong Kong and Macao), and deposit that amount into employee personal accounts established by the Bureau of Labor Insurance. As account holders, employees have full right to this special account, and can withdraw their pension without being impacted by job change, position loss or business closing. Employees may also voluntarily contribute up to 6% of their monthly wage to their pension fund, and this contribution is fully deductible from personal income tax. Workers may withdraw their pension upon reaching age 60. Those who have contributed to the pension fund for more than 15 years are to apply for monthly pension disbursement, and those who have contributed for less than 15 years are to apply for lump sum disbursement.
In addition, the employer is the signatory for the pension insurance contract, the employee is the beneficiary, the coverage is limited to the insured, and the insurance company for the annuity insurance must be approved by the central competent authority. Payment method is determined by the terms of insurance policy of the insuring company. Moreover, employer contribution for the annuity insurance must not be less than 6% of the employee monthly wage.
However, the new pension system has resulted in subsequent problems. For example, Guo, Ming-Cheng (2006) pointed out that Individual Retirement Accounts lacks a risk-sharing function, and lacks the mechanism for adjusting pay criteria according to consumer or salary index, and thus unable to fulfill the function of social
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security. In addition, as a state-owned monopoly, it can invest in or withdraw from any stock market or engage in any form of investments, and may result in the government controlling the overall economy of the country, unless changes are made to the management of pension funds. Furthermore, the new pension system is seriously interfering with the property of labors and employers.
Regardless of the lump-sum disbursement of the old system or disbursement by installment of the new system, the greatest controversy in the nation’s labor pension system is that while the amount receivable by the worker is fixed by mandatory employer contribution and employee voluntary contribution, the inconsistency is that for those who opts for disbursement by installment, funds remaining in their personal accounts are not adjusted according to the impact of economic development or inflation. As a result, it is difficult to ensure the livelihood of retirees, and challenges the financial security of old age.
Furthermore, frequent turmoil in the global financial environment in recent years has a significant impact on labor insurance or labor pension fund. Citing data from the Council of Labor Affairs (CLA), ETtoday (2012) pointed out that deficit in the labor insurance fund balance will occur in 2017, which is earlier than expected the 2020. This means that beginning in 2018, the labor insurance fund will be siphoning off its capital, and a bankruptcy threat is foreseen for 2027, which is ahead of the expected 2031. Therefore, the majority of the public needs other forms of commercial insurance planning and preparation in addition to labor insurance, labor pension and national pension insurance, especially in terms of financial resources for retirement living or nursing care. In particularly, a rapidly aging population and potential subsequent problems of financial security during old age are the major reasons for involving commercial insurance.
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