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Financial Economics


Evaluating the Social Security Subsidy Program in Korea

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  • Author KIM. Dohyung
  • Date 2016/09/29
  • Series No. KDI FOCUS No. 75, eng.
  • Language English
SUMMARY □ Social security subsidies in Korea were introduced in 2012 to reduce the coverage gap in social security. Despite the large fiscal cost, however, the subsidies have only a small effect on the social security coverage: For every 1,000 workers and their employers who are subsidized under the program, the program added just 15 workers covered by social security. Rather than pursuing costly subsidization policies, the Korean government needs to make serious efforts for more efficient collection of social contributions to close the coverage gap in social security.

- To reduce the coverage gap in social security, the Korean government began to provide subsidies for the social security contributions of low-wage workers and their employers in small establishments.

- The subsidy program matches workers’ and employers’ contributions to the national pension and the unemployment insurance scheme.

- About 0.9 million workers and their employers in 0.5 million establishments were subsidized by the subsidy program in 2015.

- For every 1,000 subsidized employees and about 600 subsidized employers, the subsidy program creates only 15 additional covered employees.

- Unlike similar active labor market policies adopted in several European countries, the subsidy program had no discernible effect on employment.

- The subsidy program can act as a tax rather than a subsidy depending on whether the uncovered worker contributes to the medical insurance scheme.

- The subsidy program is contradictory because it gives subsidies for participation in mandated schemes as if it was a choice initially.

- A large informal sector with a modest social contribution burden in Korea indicates a sizeable room to enhance administrative efficiency for reducing coverage gap in social security
KDI VOD Report
Job creation programs for boosting employment have been on the rise in Korea following the 1997 Asian financial crisis.
Currently, 196 programs are in operation under 25 ministries,
with a budget of 16 trillion won in total.

The job creation programs can be classified into six categories:
Unemployment Benefits provide the unemployed with financial assistance for living expenses.
Employment Services provides information to and support to those searching for employment.
Vocational Training and Start-up Support help foster capabilities needed gain reemployment.

For cases these programs do not help much,
the government provides subsidies for employment,
and even directly provides temporary jobs in the public sector.

In early 2016, the government and KDI thoroughly examined the full set of job creation programs for an overhaul.

Vocational training is an important public program which is designed to make the unemployed to have the right skills demanded in the market.
However, because of tight control over training fees and procedures,
the training agencies fail to provide the skill that matches market demand.

As a result,
the program participants have a very low chance of finding a job after completing the training.
Furthermore, among those who find a job, only one out of ten ends up with a job requiring the skills she is actually trained for.
If the problem is not a mismatch nor information shortage, then the government provides subsidies for employment.
The employment subsidies have to be given for a clearly targeted group
because they may generate unintended consequences that subsidized workers crow out non-recipient workers.

Unfortunately, in Korea, about 90% of the subsidies are used to support existing jobs whereas only 10% of the subsidies are used to create new jobs.

Exactly the opposite is true for other OECD countries:
9% of the subsidies go for existing jobs
and 91% go for newly created jobs.

Social security subsidy program is another example of a poorly targeted subsidies.
The program was designed to reduce the coverage gap in social security
using subsidies that match social contributions
of low-wage workers and their employers.

However, the subsidies are paid out to any eligible workers
and employers regardless of the worker’s coverage at the time of subsidy application.
The number of recipients rose quickly reaching 0.9 million in 2015
and the annual fiscal cost amounts to 0.5 trillion won.

To measure the effects of the subsidies on the number of covered workers,
we compare over-time change in the number of covered workers in pilot regions
with that in non-pilot region.

The estimated effect implies that for every 1,000 subsidized workers, the subsidies generated just 15 additional covered workers.

Only 1.5% of the public money used contribute to closing coverage gap
and the rest are used simply as income transfer,
especially for employers in small establishments.

To reduce coverage gap in social security,
the government needs to make serious efforts to integrate tax and social contribution collections under tax collection agencies, instead of pursuing subsidization policy.

In conclusion, most of 16 trillion-won-budget has to be spent for core programs such as employment service and vocational training that can create new employment.

On the other hand, creating temporary jobs in the public sector at normal times
has to be avoided, which may discourage the unemployed to seek a better job in the market.
In addition, employment subsidies and social security subsidies need to be scaled down, which support small marginal firms rather than create employment.
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