Cablegate: Taiwan Pension Reform

This record is a partial extract of the original cable. The full text of the original cable is not available.

202306Z Nov 05

UNCLAS SECTION 01 OF 02 TAIPEI 004627

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Pension Reform

1. Summary: Taiwan's Examination Yuan on November 10 cut
monthly government pensions to a maximum of 85-95% of pre-
retirement pay. The change cost the ruling Party little in
terms of political support because most retired civil
servants belong to the opposition, but they will further
polarize Taiwan society along Party lines. End summary.

Approval Process
----------------

2. On November 10, the Examination Yuan (with powers
similar to the U.S. OMB and OPM) approved a new civil
service retirement pension reform program submitted by the
Ministry of Civil Service (MCS). The reform is not subject
to Legislative review and approval because no law is amended
by the action. The Examination Yuan will implement the
program after the Executive Yuan approves similar reforms of
the pension system for the military and public-school
teachers. Implementation of these reforms will likely be in
December 2005.

Rationale for Pension Reform
----------------------------

3. The Control Yuan (CY) indicated in its 2001 inspection
report of the Examination Yuan that 18% preferential
interest rates for bank deposits of retired government
employees was unreasonably higher than market-based rates,
and had pushed up monthly pension compensation to levels
higher than the pre-retirement pay for many retirees.

Historical Background
---------------------

4. The former KMT government first adopted the preferential
interest for deposits of military retirees with an
administrative order issued by the Ministry of National
Defense in 1953, six years after the government was
relocated from China to Taipei. The KMT-controlled
government administratively expanded the coverage of the
preferential interest rates to include civil service
retirees in 1960, public-school teachers in 1965, and KMT
Party workers in 1971. The preferential interest rate was
raised from 14.25% in 1979 to 18% in 1983 because the then
prevailing lending rate was 15-21%.

5. However, the preferential rates were not adjusted
downward as bank deposit rates have declined. The current
gap of over 16 percentage points between the preferential
rates and the market rates has helped push up retirement
compensation well above pre-retirement pay.

6. According to the MCS, the preferential rates have become
a heavy burden, particularly for local governments. For
half of Taiwan's county and city governments, personnel
expenditures account for over 90% of total educational
expenses. The ratio exceeds 95% for seven counties and
cities.

Contents of Reform
------------------

7. According to the planned reform, the scope of the 18%
preferential interest rate will be reduced and retirement
compensation will be capped at a level no more than 85% of
the pre-retirement pay for less than 25 years of service and
no more than 95% for above 35 years of service. Higher
ranking officials (above bureau director general), will
receive no more than 75% of pre-retirement pay for up to 25
years service and no more than 80% for above 35 years
service.
Affected Retirees
-----------------
8. According to estimates by the MCS, 240,000 retirees and
government employees will be affected, including 160,000
teachers, 80,000 civil service employees (including 16,000
retirees), and only some 100 of the highest ranking military
officers (only a small number of military retirees are
affected because most military pre-retirement incomes fall
below the program threshold.)

COMMENT
-------

The passage of the plan will likely further polarize Taiwan
society along political lines since most retired civil
servants support the opposition parties. However, it may
win general approval for removing a special interest
privilege. In one city, Taichung, the DPP believes that the
pension adjustment is proving a net negative for its
candidates in the coming election. The DPP government
intends to use some of the funds saved for social programs,
many of which will benefit southern farmers, a special
interest group more sympathetic to the DPP.

PAAL

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