"National Pension and Basic Pension Should Be Integrated and Reformed to Receive Benefits Proportional to Contributions"

Report on "National Pension Reform Plan" Released on the 7th
"Let's Implement a Dual System of New Basic Pension and Proportional Pension"

[Asia Economy Reporter Moon Chaeseok] There has been a call for a comprehensive reform of the National Pension System's structure and functions. It is argued that the 'equal pension' portion should be integrated with the existing basic pension, and the National Pension should be thoroughly revised into a proportional system where benefits correspond strictly to contributions.

The Korea Economic Research Institute under the Federation of Korean Industries released a report titled "Problems and Reform Measures of the National Pension" on the 7th, commissioned to Lee Yongha, a visiting researcher at the Korea Institute for Health and Social Affairs. According to data from the National Pension Financial Projection Committee, the current National Pension finances are expected to turn into a deficit by 2042, and the fund is projected to be depleted by 2057. It is forecasted that if operated on a pay-as-you-go basis, the contribution rate could approach 30-40%. The report also pointed out the broad blind spots in issues such as elderly poverty. The pay-as-you-go system means covering the pension payments needed in a given year with the contribution income of that same year after the fund is depleted.

The Korea Economic Research Institute stated, "The current elderly generation faces the highest poverty rate among OECD countries, but the National Pension has failed to resolve this," adding, "There are also wide blind spots among the working generation due to difficulties in income verification, making it difficult to expect a resolution to elderly poverty over the coming decades." The researcher pointed out, "Korea's National Pension system has been forcibly expanded to groups such as regional subscribers whose income is not verified, creating blind spots and distorting redistribution," and "Underreporting of income by regional subscribers lowers the average monthly income of all subscribers, which in turn hinders the increase of both the equal and proportional pension portions linked to it."

The report advised against resource-intensive measures such as raising contribution rates. The Korea Economic Research Institute criticized, "Parametric reforms like increasing contribution rates or income replacement rates will only exacerbate distortions in the National Pension system." The income replacement rate refers to the proportion of retirement benefits relative to lifetime average income. Raising contribution rates significantly affects regional subscribers' enrollment and income reporting, potentially expanding blind spots and causing downward adjustments in reported income. Even a 1 percentage point increase is estimated to delay fund depletion by only 2-3 years. The report forecasts that avoiding fund depletion is unlikely without a substantial increase to around 15-20%. The institute emphasized, "Calls to raise the income replacement rate do not provide clear answers to financial instability," and "The effects of increasing the income replacement rate appear over decades, thus not helping to alleviate poverty among the elderly generation."

In response, the researcher proposed, "The redistribution and basic security functions should be integrated with the existing basic pension, and the National Pension should be reorganized to focus on its savings function where benefits correspond to contributions." He suggested a dual system composed of a 'new basic pension' that integrates the equal portion and the existing basic pension, and a 'proportional pension' responsible for the savings function. He stated, "The coverage of the new basic pension should be expanded from the current bottom 70% income bracket to include National Pension recipients and their spouses within the top 30% income bracket."

Regarding the income replacement rate, the researcher proposed, "The new basic pension's income replacement rate should be set at 15% (approximately 400,000 KRW), and the proportional pension should guarantee 25% of individual income," adding, "In this case, single-person households would be guaranteed a combined income replacement rate of 40% from the new basic pension and the National Pension." He also noted, "If the 'average monthly income of all subscribers,' which is the basis for calculating the new basic pension, is gradually replaced by GDP per capita, an appropriate benefit level can be achieved and maintained."