President Yoon Suk Yeol on Thursday unveiled a new proposal to reform the nation’s ailing pension system by asking older workers to pay higher contributions than the younger generation, but experts warned of a tough road ahead because it would be difficult how to define generations between the younger and the older.
Established in 1988, South Korea’s pension system was originally designed to guarantee a certain amount of income after retirement. With the nation rapidly aging and birthrate plunging, worries have grown that the younger generation would not receive pension benefits despite their contributions.
Under the current system, the pension system is expected to go into deficit starting 2041 and completely run out in 2055, according to the National Pension Service.
“A pension system that leaves senior citizens poor and young people suspicious must be reformed fundamentally,” Yoon said during a televised press briefing, presenting sustainability, fairness and income security as three key principles of
the envisioned reform.
President Yoon Suk Yeol delivers a state affairs briefing at the presidential office in Seoul on Aug. 29, 2024. (Yonhap)
Yoon called for the “need to differentiate the pension contribution rates” for young and old generations, while gradually raising their contribution rates. However, Yoon did not give any new contribution rates.
The government will also push for enacting a law that provides a state guarantee for pension payments due to people when they retire amid concerns about the fund drawdown, Yoon said.
Currently, the working age population is supposed to contribute 9 percent of their annual income to the fund and the income replacement rate is set at 40 percent.
Experts say the 9 percent rate is low by international comparisons and given the country’s rapid aging and an ultra-low birth rate. The average contribution among member nations of the Organization for Economic Cooperation and Development (OECD) stands at 18 percent.
People of working age accounted for about 70 perc
ent of the population of South Korea in 2021, but the proportion is projected to fall significantly to about 50 percent by 2050.
People aged 65 and older are expected to account for 20 percent of the total in 2025, compared with 14 percent in 2018, and the proportion would rise further to 46.4 percent in 2070, according to government data.
The total fertility rate, which means the average number of expected births by a woman in her lifetime, hit a record low of 0.72 in 2023, which was far below the 2.1 births per woman needed to maintain a stable population without immigration.
Yoon also called for the introduction of an automatic stabilization mechanism, under which pension parameters or benefits automatically change in line with changes in demographic, economic or other factors.
The predefined rules are expected to erase uncertainties in running the system, and major nations employ such a scheme, officials said.
A person checks job posts using a magnifier at a job fair for senior citizens in Seoul in t
his file photo taken Dec. 13, 2023. (Yonhap)
Professor Kim Tae-il of Korea University said the government needs to “adjust the entitlement age of the pension benefit and to review using money in state coffers in five to 10 years, as it seems implausible to raise the contribution rate to more than 13 percent.”
The entitlement age of the pension benefit is currently set at 63, and is supposed to go up to 65 in 2033.
Lee Yong-ha, a former chief of the National Pension Research Institute, called for a more cautious approach, as a drastic rate increase could cause more low-income earners to shun the subscription.
In a report issued November 2023, the International Monetary Fund said raising contribution rates significantly and increasing the retirement age further will be necessary to ensure the fiscal sustainability of the pension system.
South Korea’s retirement age is set at 62, which is below the average of the OECD member nations of 64.
“Adjusting the contribution and income replacement rate would postp
one the fund depletion by about seven years, and it cannot be a fundamental solution,” Bahk Jae-wan, chief of the Hansun Foundation and former finance minister, said.
“Comprehensive structural reform of the overall pension system is required to address the problem,” he added.
Yoon said his government will soon announce details, asking for active cooperation at the National Assembly for law revision.
A pension system reform has long been a major policy goal by former presidents, but there has been little progress.
Source: Yonhap News Agency
