Committee on pension reform likely to propose pay more, receive later plan

[Photo by Lee Seung-hwan]

A fiscal calculation committee under South Korea’s Ministry of Health and Welfare is likely to include a proposal in the national pension reform that would make prospective pensioners pay and receive more in its report to be submitted to the government on Friday.

In August, the committee, an advisory body on national pension reform, presented 18 scenarios that focus on the pay more and receive later plan without adjusting the current income replacement rate.

The welfare ministry is expected to submit a comprehensive operation plan for the national pension to the National Assembly at the end of this month based on the committee’s report.

Given that some proponents of strengthening income security are preparing a separate report that aims to increase the income replacement rate to 50 percent by 2028, the controversy surrounding pension reform is expected to increase further.

According to sources on Wednesday, Nam Chan-seop, a professor of Social Welfare at Dong-A University, and Joo Eun-sun, a professor at Kyonggi University, who quit the fiscal calculation committee to advocate for greater income security, are preparing a report that calls for a raise in the national pension insurance premium rate to 12 percent and income replacement rate to 50 percent from the current levels of 9 percent and 40 percent, respectively.

Under the scenario, the contribution rate paid by policyholders is estimated to rise to as high as 37 percent of their monthly income once the pension fund is exhausted. Concerns rise that this could increase the burden on future generations instead of providing income security for the current generation.

The core of the income security reform proposal lies in significantly increasing the income replacement rate, which determines the amount one receives as a pension. The current rate of 40 percent means that a member with an average monthly income of 1 million won ($746) will receive 400,000 won per month after retirement if he or she contributes to the pension for 40 years.

The proposal aims to raise the amount to 50,000 won. Proponents of the proposal argue that increasing the income replacement rate is essential to preserve real retirement income, which is the essence of public pensions.

The issue is that increasing income security for the current generation may lead to a greater financial burden for future generations.

The committee previously estimated the financial outlook of the National Pension Service under different reform scenarios up to the year 2093.

Under the income security scenario, the pension fund would be depleted by 2093, and each year, workers would have to pay insurance premiums equivalent to 37 percent of their wages to provide benefits to retirees.

Given that the insurance rate is 29.7 percent under the current system, this means that an additional 7.3 percent of monthly wages will be spent on insurance premiums.

The income security scenario has a relatively smaller increase in the contribution rate, which also affects the timing of pension exhaustion.

The financial stability of the National Pension Service is deteriorating, data showed.

In the third financial calculation conducted in 2013, the deficit point and exhaustion point for the pension fund were estimated to be 2044 and 2060, respectively.

However, in the fourth calculation in 2018, these estimates were brought forward to 2042 and 2057. In this year’s fifth calculation, the estimates have accelerated further to 2041 and 2055, respectively.