[2021 National Audit] 'Depleting Crisis' Employment Insurance Fund's 'Short-term Trading' Operation Yields 2.8% Return

Short-Term Fund-Focused Investment Strategy Fails
'Long-Term' Focused Industrial Accident Insurance Fund Achieves 6% Returns

[Sejong=Asia Economy Reporter Moon Chaeseok] Amid the accelerated depletion of the Employment Insurance Fund due to the expansion of unemployment benefits, it has been revealed that the fund's operating yield is also low. Critics point out that the fund missed opportunities to generate higher returns by adopting an investment strategy focused on short-term funds.

According to data submitted by the Ministry of Employment and Labor to Kim Sung-won, a member of the National Assembly's Environment and Labor Committee from the People Power Party, the yield of the Employment Insurance Fund stood at only 2.82% at the end of July. After recording 7.06% in 2019, it fell to 5.72% last year, and this year it has halved.

The sharp decline in yield was largely influenced by the 'short-term' focused investments. The proportion of short-term investments in the Employment Insurance Fund surged from 1.52% in 2017 to 25.9% last year. This year, it remains high, exceeding 14%.

The increase in short-term investments was due to the need for more cash caused by increased expenditures. A Ministry of Employment and Labor official explained, "The amount invested in short-term funds increased from about 500 billion KRW in 2017 to about 890 billion KRW this year," adding, "This was to secure reserves necessary for paying unemployment benefits and employment retention subsidies amid COVID-19."

In other words, in order to secure funds for expenditures, the fund had no choice but to increase the proportion of short-term investments, which yield lower returns. The official added, "Compared to stocks and bonds that take several days to liquidate, short-term funds can be converted to cash immediately upon sale, so we increased short-term investments to secure liquidity." Meanwhile, the proportion of domestic stocks decreased from 24.3% in 2017 to 11.9% last year and 6.81% this year.

Due to increased expenditures and decreased yields, the fund's reserves have sharply declined. From 10.2544 trillion KRW in 2017 when the Moon Jae-in administration took office, it dropped to 9.4452 trillion KRW in 2018 and 6.6996 trillion KRW last year. As of the end of July this year, it fell to 4.7197 trillion KRW. More than half of the fund has disappeared in four years.

Despite the decrease in fund size, expenditures have continued to rise. According to the "Labor Market Trends in August 2021 Based on Employment Administration Statistics" released by the Ministry of Employment and Labor on the 13th of last month, unemployment benefit payments in August exceeded 1 trillion KRW for seven consecutive months since February, reaching 1.0371 trillion KRW. Due to the depletion of fund finances, deposits (borrowings) borrowed from the Public Fund Management Fund last year and this year amount to 7.9 trillion KRW, with an annual interest burden of 130 billion KRW. It is expected that an additional 15 trillion KRW will be borrowed by 2024, with cumulative interest reaching 1 trillion KRW by then. Consequently, the government decided to raise the employment insurance rate by 0.2 percentage points (p) starting in July next year.

There are calls to refer to the case of the Industrial Accident Compensation Insurance Fund, which achieved high returns by adopting a long-term investment strategy. According to the financial investment industry, the Employment Insurance Fund often invests in ultra-short-term assets such as 1-day or 3-day instruments to make frequent payments. It is said to be difficult to invest hastily even in short-term assets requiring about one week to fifteen days.

A pension fund official explained, "Due to the frequent disbursement characteristics of the Employment Insurance Fund, it has been considered a 'major player' in the short-term funds market," adding, "Even so, it is a serious situation that the proportion of short-term investments exceeds 10%."

National Assembly Environment and Labor Committee member Kim Seong-won of the People Power Party. (Photo by Kim Seong-won)

This content was produced with the assistance of AI translation services.