Gov't proposes first pension contribution hike in 3 decades

The government unveiled the first proposal to raise pension contributions in nearly three decades with a plan to gradually raise the rate from 9 to 13 percent, weighted by age group.

A National Pension Service office in Seodaemun District, western Seoul, on Wednesday. [YONHAP]

The government has unveiled a proposal to gradually raise the national pension contribution rate from 9 percent to 13 percent with the first increase in nearly three decades.

The plan, announced by the Ministry of Health and Welfare on Wednesday, also suggests weighting the pace of the increase based on the age of contributors, following concerns over the sustainability of the country's pension system as Korea faces a rapidly aging population and a declining birthrate. These demographic shifts have sparked fears that younger generations may not receive the pension benefits they are contributing to.

Under the proposed reform, wage earners would be required to contribute 13 percent of their income to the national pension. The contribution rate, which refers to the portion of an individual's monthly income allocated as a premium for the pension scheme, has been fixed at 9 percent since 1998.

The reform proposal is subject to approval by the National Assembly. It marks the first government pension reform plan in 21 years.

The plan outlines a gradual implementation of the new rate, with the speed of the increase tailored to different age groups. Under the proposal, those in their 50s would see their contribution rate rise by 1 percentage point annually beginning next year. For individuals in their 40s, the rate would rise by 0.5 percentage points each year, while those in their 30s would experience a 0.33 percentage point annual increase and for those in their 20s, 0.25 percentage points per year. This age-based, staggered approach is unprecedented on a global scale, and has drawn concerns that it could encounter resistance from older populations.

Health Minister Cho Kyoo-hong announced the first government pension reform plan in 21 years during a briefing in Seoul on Wednesday. [YONHAP]

"The national pension scheme has been a cornerstone of secure retirement for citizens since its introduction in 1988, yet is now confronting a critical sustainability crisis due to low birth rates and an aging population," Health Minister Cho Kyoo-hong said during Wednesday's announcement.

"The focus of the reform is to enhance the pension system's sustainability so that all generations can benefit," Cho added. "We have carefully reviewed measures to further protect the retirement security of the public, with a focus on maintaining intergenerational equity."

While proposing an increase to the contribution rate, the government plans to maintain the nominal income replacement rate, which represents the proportion of pre-retirement monthly wages covered by the pension, at 42 percent without an additional cut.

Initially set at 70 percent when the system was launched, the rate was reduced to 50 percent by 2008 on an annual decrease of 0.5 percentage points with the aim of reaching 40 percent by 2028. However, responding to public concerns over income security, the government has decided to keep the replacement rate at 42 percent for next year.

Another major change under consideration is the introduction of an "automatic adjustment mechanism," which would calculate pensions based on life expectancy and changes in the number of contributors with the goal of enhancing the stability of the fund. Currently, pension payments are adjusted according to inflation.

Health officials noted that similar systems, which adjust payouts in response to demographic changes, are already in place in many OECD countries to ensure the long-term viability of their pension schemes. While the new mechanism could result in payouts that lag behind inflation, the government expects such a system to delay the depletion of the pension fund.

The government also intends to raise the monthly basic pension for low-income seniors from 300,000 won ($223.50) to 400,000 won, fulfilling one of the key policy goals of the Yoon Suk Yeol administration.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]