Time for national pension reform

Reforms to the pension system for the entire population must be accompanied by changes in policies for the labor and capital market that rely on pension fund investments.

Kim Won-shikThe author is a professor emeritus at Konkuk University. In its review of the Korean pension system, the Organization for Economic Cooperation and Development (OECD) reiterated the need for reform. It recommended the Korean government raise the starting age for benefits to 68 by 2034 in preparation for a society that was getting old fast. The condition of the national pension fund is more serious than the OECD’s advice. Its problems do not stop at structural issues like the premium rates and payout sums, and are aggravated by uncontrollable factors like a low birthrate, return rate of pension fund investment, and inflation.

Korea’s total fertility rate, which hit a very low 0.81 last year, worsened to 0.75 in the second quarter. The National Pension Service (NPS) recorded dismal return rates of negative 19 percent in investments in local stocks and negative 12 percent in offshore stock investment in the first half. As a result, its funds shriveled 8 percent. Payouts were adjusted up by 2.2 percent this year based on last year’s inflation rate. Given this year’s jump in inflation, the payouts will likely be doubled next year. In contrast, revenue from premiums could shrink due to a slowed economy. Such factors harm the financial health of the NPS. The younger generation will likely demand reform so that their payouts in old age can be ensured.

Since the introduction of the national pension fund, there have been four rounds of discussions on reevaluation of the pension fund and reforms focused on raising premiums and payouts to enhance security and sustainability of the fund. Each round ended unsurprisingly as a political show. The National Assembly Special Committee on Pension Reform may not be any different. Even if a public consensus is reached to raise premiums and lower payouts, the results could change depending on political circumstances.

Too big a raise in premiums to bolster pension reserves could discourage workers and hurt the economy. If the premium rate is doubled to 18 percent, honest payment may not be expected due to its impact on monthly income. Any reform in the national pension must be carried out in a way to minimize the negative impact on the labor market and economy.

Pension benefit periods cannot be extended indiscriminately in a super-aged society. Since the average life expectancy was 70.7 in 1988, when the national pension system was introduced, pensions on average could be paid out for only five and half years if the benefit stating age is 65. Since life expectancy for Koreans is now 84.1, pensions must paid out for 19 years. As the average job starting age has increased to 30, pension contribution periods have been shortened.

Given the factors indicating a crisis for the pension system, the benefits receiving age should be raised first. If the government raises the pension benefits age by a year to 70 from 2025, payouts in 2030 could be saved by more than one fourth.

At the same time, the retirement age should be extended or scrapped so that people who wish to continue to work can do so without discriminative performance-based pay. Middle-aged or older workers should be able to use employment insurance for training during working years or for a new career in their older age. The role of retirement pensions also should be reinforced to compensate for gap years before pension benefits start.

Reforms to the pension system for the entire population must be accompanied by changes in policies for the labor and capital market that rely on pension fund investments. There could be a limit to the role by the Ministry of Health and Welfare. Reforms should be commanded by the Ministry of Economy and Finance to coordinate various related issues through governance reform. Translation by the Korea JoongAng Daily staff.