Wonshik Kim

Representative, Research Center for Harmonious Society, Hansun Foundation

Visiting Professor, International Center for Public Policy, Georgia State University

kwonshik@gsu.edu

The fundamental reason for introducing the welfare system is the eradication of poverty. At least from the foundation of the Republic of Korea until the 1970s, the welfare system was maintained as a means of alleviating poverty through the provision of basic food, clothing, and shelter. From the introduction of the 'Livelihood Protection Act' in 1961 to the 1970s, the Korean welfare system focused on protecting and maintaining the basic living standards of the people in terms of food, clothing, and shelter. Due to the lack of social welfare infrastructure, a cash-based welfare system was operated during this period.

In addition, the government actively promoted economic self-reliance among the people as a means of eradicating absolute poverty, which in effect served as welfare for the people. Examples of this include the Saemaul Undong (New Community Movement) and the various Five-Year Economic Development Plans. These achievements have led to the expansion of the welfare sector from simply eradicating poverty to ensuring a stable and satisfying life for the people.

The Livelihood Protection Act was abolished in 2000 and replaced with the Basic Living Security Act, which provides various cash benefits as social assistance. However, the blind spots of poverty remain unsolved because efforts to understand and suppress the causes of poverty have been insufficient. In other words, cash-based welfare programs showed limitations in finding the causes of poverty and preventing it in advance. It is necessary to create a service system that closely protects the poor, guarantees opportunities for recovery, and helps them become self-sufficient and reintegrate into society.

In these respects, the introduction and establishment of the social insurance system in the 1980s served as a turning point for transforming the welfare system from cash-based to service-based. However, as a means of filling the insufficient welfare infrastructure, social insurance became more focused on income redistribution, which limited its ability to improve the stability of people's lives and their satisfaction with welfare. In addition, as people's income increased, their welfare needs expanded beyond basic living security to include high-quality childcare, healthcare, education, and housing, and the intensity of these needs accelerated. This phenomenon led voters to consider welfare spending as a criterion for their choice in elections.

The government perceives the concept of the welfare system as simply fulfilling the basic needs of various groups with cash handouts and fails to provide incentives for them to escape the poverty trap. This hinders social mobility. Therefore, creating an environment where low-income people can become self-sufficient should also be at the core of the welfare system. This includes, for example, high-quality and systematic childcare and education, medical care based on health, and prohibition of discrimination between classes.

The fertility rate in Korea has been continuously declining, reaching 0.65 in the fourth quarter of last year. If the current trend continues, the fertility rate will remain at the level of a virtual birth strike. Considering that the decision to have children is related to the happiness of children yet to be born, the frustration of the current young generation who are about to become parents will inevitably lead to further avoidance of childbirth. Therefore, unless there is an innovative and tangible improvement in welfare services, it will be impossible to solve problems such as poverty, low fertility rate, and old-age anxiety due to aging.

Furthermore, the campaign promises of the ruling and opposition parties in the recent general election show little interest in fundamentally improving the welfare satisfaction of our society. They remain at the level of populism, expecting votes through cash-based support that has been continued until now. The People Power Party has proposed a low fertility rate pledge of 3 trillion won per year.

The Democratic Party, on the other hand, is proposing a pledge of 28 trillion won per year as an extension of the Moon Jae-in government's universal welfare and Representative Lee Jae-myung's basic income policy. If we convert this to the amount of five years for the president's administration, it will cost 140 trillion won. This is equivalent to 40% of the 332 trillion won budget spent in the 17 years from 2005 to the present. In addition, considering the government's budget for basic pension and long-term care insurance for the elderly and the potential liabilities of the national pension and public occupational pensions, the people's ability to pay for welfare will be limited seriously.

The Moon Jae-in government's income-driven growth and massive welfare expenditures have only increased the people's desire for cash, making it a major obstacle to reform. In 2023, the government's welfare budget, including health, welfare, and employment, was already 37 percent of total expenditure. Considering pension and medical expenditures due to the aging population and government support to boost the birth rate, the current cash-based support is likely to lead to fiscal ruin. Without additional government tax revenues, an increase in welfare expenditures will lead to an increase in the national debt, a decline in national creditworthiness, and economic instability. I think our society is addicted to the sweet subsidies of the moment, not the distant future.

According to the OECD (2019) report, the subjective welfare dissatisfaction rate of Korean citizens is 19.2%, which is two to three times higher than that of major developed countries. Despite the government's massive support, the welfare satisfaction rate is not improving because the people do not feel the quality of the services. Therefore, unless an efficient supply system of welfare service is established that allows people to experience improved quality, the people's demand for welfare spending in cash will only explode. This could eventually lead to hyperinflation and a social crisis like Argentina.

It is time to shift the direction of welfare policy from cash-based to service-based. Welfare services should not be provided solely by the government. Diverse needs should be met through the participation of the private sector, and religious and non-political civic groups. As the economy and society develop, the welfare needs of various classes, including income, are bound to expand.

Accordingly, there is a serious market distortion in the welfare services that individuals need, such as education, medical care, nursing care, and housing, which only fuels price increases and increases the actual burden on the people. This effectively leads to an increase in the welfare burden on the people and a relative decrease in their spending power. In other words, it makes it harder to live.

Therefore, to improve the welfare satisfaction of the people, it is necessary to prioritize policies that innovatively improve the service capacity of the welfare sector rather than government spending. In the case of the poor, they are often unable to get a chance to recover due to social and economic barriers. The government should provide a welfare system centered on services, and the private sector should provide various services according to the welfare needs of individuals.

For the private sector to be able to participate in the welfare service industry, it is necessary for the government to deregulate various related sectors and to support their businesses. Therefore, there is an urgent need to enact the Standard Act on the Development of the Service Industry (SADSI), which was proposed in 2011 and was discarded almost every time before being proposed by the National Assembly. The SADSI provides government support for services in all sectors except agri-food, manufacturing, and construction. Therefore, it will be an opportunity to expand the supply of diverse and high-quality services in fields such as welfare-related medical care, education, content, and information and communication technology, and increase the price competitiveness of related services.

This can not only replace government-centered bureaucratic welfare services at a lower cost but also offer a variety of programs that are more tailored to individual needs. In addition, it can not only improve the industrial productivity of manufacturing and other industries but also create opportunities to launch high-value-added products through convergence with manufacturing. The current strike by medical interns, which is taking place in response to the excessive increase in the number of medical school admissions, is an explosion of dissatisfaction among young doctors who are tied to health insurance despite the rapidly expanding demand for the medical sector in the socio-economic context.

The proportion of the service industry in Korea's GDP is 57%, which is lower than that of Japan (69.5%), Germany (62.9%), and the United States (77.6%). It is also significantly lower than the OECD average of 71%. Moreover, the service industry's share of total exports in 2022 was 15.9%, which is very low compared to the UK (48.1%) and the US (31.0%).

The service industry not only has higher added value than the manufacturing industry but also provides an opportunity to increase trust and status in Korea by increasing contact with overseas consumers in the overseas market. The SADSI will be a catalyst for providing employment and income generation opportunities for young people with talents.

The service industry based on semiconductors, ICT, robots, and AI will lead to innovation in the production sector and provide an opportunity to improve the working environment for workers suffering from major accidents.

The enactment of the SADSI will provide opportunities for national wealth creation along with the development of the service industry and improvement of national well-being while saving the government expenditure on welfare programs. The government should proactively relax regulations related to welfare services and expedite the support and management system for private-sector welfare service providers.