S. Korea’s pension contributions likely to double to delay fund depletion

[Photo by Lee Seung-hwan]

South Korean people will have to pay over 12 percentage points more in contributions in the next 10 years to stabilize the struggling finances of the National Pension Fund, according to study conducted by the Korea Institute for Health and Social Affairs.

The study unveiled that a person will have to pay more than 21 percent after 10 years from the 9 percent contribution being made from their monthly salary under the current system. This is higher than the average of 18.2 percent among members of the Organization for Economic Co-operation and Development.

If the plan that entails a higher contribution rate takes effect, the depletion of the national pension fund could be delayed by about 30 years than originally predicted, but it will face a backlash from those who have to pay more in pension contributions.

Thie study, which was submitted to the National Assembly Research Service at the end of last month, stated that the National Pension Fund should maintain a “2 times reserve ratio” at the end of 2093. A 2 times reserve ratio herein refers to the capability of being able to provide national pension benefits to the insured for two years without receiving any contributions. The goal after the fourth fiscal estimate for the national pension, which was released in 2018, was to achieve a 1 time reserve ratio by 2088.

The national pension fiscal estimate takes place every five years to review the financial status of the national pension. It started in 2003 pursuant to the National Pension Act and the fifth one is currently underway, which will serve as the basis for future reforms.

The scenario presented this time by KIHASA has the same base period of 70 years as five years ago, except that the reserve ratio has been increased given the rapid aging population. The main idea of the pension reform proposed by the institute is to raise the contribution rate from the current 9 percent to 21-22 percent.

[Sources : MK DB, KIHASA]

According to the report, if the contribution rate is raised to 21 percent or more for a period of up to 10 years, the national pension fund will be able to survive beyond 2090, delaying the depletion by more than 33 years from 2057 as predicted in the fourth fiscal estimate.

KIHASA proposed that the new national pension should be income-proportionate to allow those who “pay more to get more.” Currently, the amount of national pension payment is determined by the average income of both the individual and all those insured, but the institute says there should be more weighting on individual income going forward.

However, KIHASA also maintained that lower income people should be entitled to a higher payment rate against one‘s own income. At present, the pension payment rate applies the same for all income groups. “It comes with a number of advantages in terms of guaranteeing old-age income and incentivizing vulnerable workers,” Yoon said.

The private advisory commission of the National Assembly’s Special Committee on Pension Reform plans to prepare a consolidated pension reform plan and submit it to the special committee by the end of this month. All considered, KIHASA’s reform plan is highly likely to affect the commission’s decision.

The special committee, which is scheduled to announce a pension reform plan by April, may also go with raising the contribution rate significantly after referring to the commission’s submitted plan, but opposition from the public remains a challenge. Meanwhile, there is also a heated debate on age eligibility for pension benefits and upper age limit for being insured. As life expectancy goes up, some say the current eligible age of 65 should be delayed to 67 or later and that people should be allowed to pay the contribution beyond 59.