[Exclusive] Review of Up to 10%P Increase in Basic Pension National Subsidy Rate

Up to 90% Support for Financially Strained Areas
Central Government Fiscal Pressure Eases Local Government Burden

[Asia Economy Reporter Jang Sehee] The Democratic Party of Korea and the government are pushing for a plan to increase the national subsidy rate for the Basic Pension by up to 10 percentage points. The aim is to strengthen the central government's responsibility for welfare projects while easing the burden on local governments. However, concerns have arisen that the central government's fiscal capacity could deteriorate as fiscal decentralization efforts, such as raising the local consumption tax rate and establishing a fund to respond to regional extinction, are rapidly advancing.

According to the Democratic Party on the 2nd, the party and government are discussing a plan to raise the current average national subsidy rate for the Basic Pension, which stands at 79%, by 6 to 10 percentage points. A Democratic Party official explained, "It varies by region, but areas with higher scores could receive up to 90%." The Basic Pension, which provides up to 300,000 KRW per month to the bottom 70% income elderly aged 65 and over, was paid starting in July 2014 after a major revision of the Basic Old-Age Pension system that had been implemented since January 2008.

The party and government plan to finalize and announce the details after discussing them thoroughly during next year's budget negotiations. Currently, the national subsidy rate for the Basic Pension is 79.2%, with an additional 2 to 5 percentage points provided only to financially strained local governments. If the subsidy rate nearly doubles as currently discussed, local governments could receive up to 90% in national subsidies depending on the region. As of this year, seven local governments, including Dalseo-gu in Daegu and Seo-gu in Gwangju, received a total of 13.9 billion KRW more.

Due to demographic changes caused by low birth rates and aging, the central government's fiscal capacity is expected to decline further. As of last year, there were 5.66 million Basic Pension recipients. The eligibility threshold for the Basic Pension was raised from 1.48 million KRW to 1.69 million KRW for single-person households and from 2.368 million KRW to 2.704 million KRW for couple households last year. In particular, the five major social welfare programs?Basic Pension, Disability Pension, Infant Care Fees, Home Care Allowance, and National Basic Livelihood Security?are mandatory expenditures stipulated by law, so fiscal pressure is expected to increase further in the future.

Regarding this, Park Wan-joo, the Policy Committee Chair of the Democratic Party, said, "Phase 1 fiscal decentralization has somewhat alleviated the financial difficulties of local governments, but it is still insufficient," adding, "To achieve genuine local autonomy, Phase 2 fiscal decentralization must be implemented."