[Enemies of Reform②] Yoon Seok-yeol's Public Pension... Raising Premiums and Increasing Basic Pension?

National Pension Contribution Rate Fixed at 9% for Over 20 Years
Hard to Delay Increase as It’s Half the OECD Average
Low Likelihood of Significant Adjustment to Income Replacement Rate
Equity and Fiscal Issues if Basic Pension Reaches 400,000 Won

[Asia Economy Reporter Song Seung-seop] The Yoon Suk-yeol administration has hinted at a 'strong structural reform' in the public sector, including public pensions. While pledging to guarantee adequate retirement income, it also intends to pursue pension reform to ensure sustainability.

The Yoon administration plans to restructure the public pension system based on the results of the National Pension financial calculation, which ends in March next year. In the second half of the same year, it will prepare a National Pension improvement plan and promote reform discussions through the Public Pension Reform Committee. The establishment of the Public Pension Reform Committee was one of President Yoon's election pledges, and in the announcement of the 110 national tasks, he promised to lay the foundation for social consensus through the committee. 'Enemies of Reform'

Difficult to Reduce Pension Amounts, but Premium Increase Possible

Currently, the National Pension is facing accelerated deficits and depletion, making stable system reform urgent. Korea's current National Pension premium rate is 9%, and the income replacement rate will be 40% in 2028. The income replacement rate refers to the value of the pension amount received compared to the present value of the average income during the pension subscription period. For example, if the present value of the past monthly average income is 1 million won, the pension received would be 400,000 won. To strengthen the financial soundness of the National Pension, premiums need to be raised and the income replacement rate lowered.

However, there is a prevailing view that it will be difficult to significantly adjust the income replacement rate. This is because Korea's income replacement rate is extremely low amid serious aging and elderly poverty issues. It falls far short compared to the appropriate income replacement rate (60-70%) suggested by the OECD. Since the Yoon Suk-yeol administration has also stated it will guarantee adequate retirement income, it is unlikely that there will be major changes in the income replacement rate.

On the other hand, there is strong demand for premium increases. The National Pension premium rate has been frozen at 9% for 24 years since it was raised by 3 percentage points in 1998. Even during the National Pension reform under the Roh Moo-hyun administration, only the income replacement rate was adjusted to 40%, but premiums were not increased. Considering that the average premium rate paid to state-led pensions in OECD countries is 18.4%, about twice Korea's rate, there is sufficient basis for an increase.

Among experts, there are predictions that the Yoon administration will raise premiums to around 12-13%. Lee Jae-hoon, head of the Social Public Research Institute, explained, "Proposing a premium rate of 16% is practically unrealistic," adding, "However, since premium increases can be combined in various ways, multiple proposals may be presented." The 4th Comprehensive National Pension Operation Plan proposed by the Moon Jae-in administration also included a 12% plan (increasing by 1 percentage point every 5 years from 2021, reaching 12% in 2031) and a 13% plan (increasing by 1 percentage point every 5 years from 2021, reaching 13% in 2036).

In this case, overcoming tax resistance from the younger generation will be key. If only the premium rate is raised while the income replacement rate remains the same or is expanded, there is a high possibility of criticism that the burden is being shifted solely to future generations. Strong tax resistance movements may emerge from the 2030 generation, who are just starting their careers, to the 4050 generation, who face significant tax impacts.

If the income replacement rate is adjusted, it is expected that tax resistance will be overcome by increasing the Basic Pension. The Basic Pension is a retirement security system that provides a fixed amount to 70% of elderly people aged 65 and over. The 110 national tasks prepared by the Yoon Suk-yeol administration include a pension reform plan along with a Basic Pension increase plan. The idea is to compensate for the reduced National Pension by increasing the Basic Pension from 300,000 won to 400,000 won per month.

Attempting Income Security through Basic Pension Could Complicate Reform

On the morning of the 16th, President Yoon Seok-yeol speaks at the New Government Economic Policy Direction Presentation Meeting held at the Corporate Growth Center in Pangyo 2nd Techno Valley, Seongnam-si, Gyeonggi-do.
[Image source=Yonhap News]

This is similar to the idea proposed by former President Park Geun-hye when she was the leader of the Grand National Party, opposing the National Pension reform of the Participatory Government. At that time, Park opposed former President Roh Moo-hyun's 'pay more, receive less' pension reform plan, fearing an expansion of pension blind spots. To address this, she proposed the introduction of the Basic Pension. The idea was to partially compensate for the decreasing National Pension with the Basic Pension. The Basic Pension was introduced in 2014, after Park's election.

The problem is that the Basic Pension increase plan is unlikely to alleviate the blind spots. This is because it has the nature of universal welfare paid to the majority of elderly people. Kwon Moon-il, director of the National Pension Research Institute, pointed out in research conducted during his time as a professor at Duksung Women's University, "The effect of the Basic Pension system on resolving blind spots was not significantly different or particularly effective in guaranteeing adequate benefits," adding, "Although the benefit amount per person is low, the beneficiary group is broad, so it is not necessarily effective."

The same applies to the 'Analysis of Elderly Poverty Before and After the Introduction of the Basic Pension' conducted directly by the National Pension Service. Although the elderly poverty rate decreased in 2015 after the introduction of the Basic Pension, it rose again within a year. Looking at the quintile ratio and Gini coefficient, elderly poverty began to expand from 2016. According to the Korea Economic Research Institute, Korea's elderly poverty rate was 43.4% in 2018, still among the highest in OECD countries.

There are also concerns about worsening national fiscal soundness. If the number of Basic Pension recipients is not reduced or the scale is not differentiated amid the rapidly increasing elderly population, the fiscal burden could snowball. The number of recipients was estimated at about 6.28 million in 2022, up from 4.35 million at the time of the Basic Pension's introduction. The pension amount was raised to 250,000 won in 2018, and from 2020, 70% of recipients receive the maximum amount of 300,000 won, which was previously only given to the lowest 20% income group. During the same period, the budget increased about threefold from 6.9 trillion won to 20 trillion won.

Fiscal soundness is deteriorating faster over time. According to calculations by the Ministry of Health and Welfare, if a monthly Basic Pension of 400,000 won is paid from 2022 while maintaining the income replacement rate, the required funds will increase to 34 trillion won in 2025. It will reach 52 trillion won in 2030 and 102 trillion won in 2040, doubling approximately every ten years.