US embassy cable - 05TAIPEI4627

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