Gov‘t proposes first increase in pension contribution rate in 26 yrs

[Photo by Yonhap]

The South Korean government on Wednesday unveiled a proposal of raising the pension contribution rate to 13 percent from 9 percent, which will delay the depletion of the National Pension Fund by 32 years.

The Ministry of Health and Welfare held a third meeting of its National Pension Review Committee on Wednesday and finalized its reform plan.

Under the plan, the government will increase the pension contribution rate, which is the percentage of monthly income paid into the pension, to 13 percent from the current 9 percent. This is the first increase in 26 years since 1998.

The income replacement rate, which refers to the percentage of average lifetime monthly income that a person will receive as a pension, will be increased from 40 percent to 42 percent.

“We proposed the contribution rate of 13 percent, considering the pension’s financial outlook, public acceptance, and discussions in the 21st National Assembly,” said Health and Welfare Minister Health Minister Cho Kyoo-hong.

“Although it would be ideal to lower the income replacement rate to 40 percent, we decided to maintain it at 42 percent to strengthen retirement income security,” he added.

Previously, the special committee on pension reform in the 21st National Assembly saw the ruling People Power Party propose a contribution rate and income replacement rate of 13 percent and 43 percent, respectively, while the opposition Democratic Party suggested 13 percent and 45 percent.

The key aspect of the government’s reform plan is the differentiated increase in contribution rates by generation.

To raise the contribution rate to 13 percent, the government will increase the rate annually by 1 percentage point for people in their 50s, 0.5 percentage point for those in their 40s, 0.33 percentage point for those in their 30s, and 0.25 percentage point for those in their 20s.

With this differentiated plan, individuals in their 50s with a monthly income of 2.99 million won ($2,243) would pay 194,000 won in monthly contributions after four years of reform, while those in their 20s would pay 149,000 won, saving 540,000 won annually.

The government also plans to legislate the guarantee of pension payments and expand credits for childbirth and military service to regain trust among younger generations.

It also unveiled a roadmap for strengthening retirement income security in preparation for a super-aged society.

The basic pension will gradually increase to 400,000 won per month, starting with low-income seniors.

To encourage the growth of private pensions, the government also plans to gradually make retirement pensions mandatory and provide tax incentives to strengthen the underutilized private pension system.