The Impact of Fiscal Conservatism ; A Case Study of the 2007 National Pension System Reform in Korea

Abstract

This research intends to identify the influential factors in the 2007 National Pension System (NPS) reform in Korea (the Republic of Korea) which drove the NPS toward a structural transformation. This research also examines the applicability of the theory of Clemens and Cook (1999) to the Korean policy shift, who argue that the innate driving force of a policy, an internal contradiction, can be a critical source of structural policy change. A literature review based case study was carried out in this research. The findings are as follows. Firstly, rising fiscal conservatism was the main determinant of the 2007 NPS structural reform. The processes and conditions of the reform documented were: the fiscal conservatism embedded in NPS generated serious policy problems and led to an accumulation of the internal contradictions within NPS by raising the question on its fundamental policy goal. As time passed without any self-correction mechanism with respect to the problematic policy, the NPS lost credibility in the eyes of the public and also lost policy legitimacy. At the same time, there was a competing policy alternative to the NPS. This was the universalistic tax-based Basic Old-Age Pension System. This has been a challenge to NPSin that it had been designed based on the social insurance financing principle. The pre-conditions for the structural NPS reform were fully complete and they could be exploited by self-interested political parties in the following policy-making stages. Secondly, the theoretical assumption that the internal contradiction of a policy can be a decisive power for structural transformation, as suggested by Clemens and Cook (1999) among others, was proven to be theoretically and practically accurate in the Korean public pension reform case.