[Exclusive] South Korea's Income Replacement Rate Approaches Advanced Countries' Average... Government Requests OECD to Include Basic Pension

Excluded from OECD Pension Report
Underestimation of Public Pension Replacement Rate
Intense Debate on Pension Reform
Need for Objective Income Replacement Rate Indicator
Request to Reflect in Year-End Report

The government has requested the Organisation for Economic Co-operation and Development (OECD) to include Korea's Basic Pension in the calculation process of the pension income replacement rate. This request comes from the judgment that Korea's Basic Pension has been excluded from the pension reports published biennially by the OECD, leading to an underestimation of the public pension replacement rate. The income replacement rate refers to the ratio of pension benefits received in retirement compared to the average lifetime income.

According to related ministries on the 25th, the Ministry of Health and Welfare requested that the OECD include the Basic Pension when calculating the public pension income replacement rate in the pension report to be published at the end of this year. In the 2021 pension report, Korea's pension income replacement rate was calculated at 31.2%, but since the Basic Pension was excluded, there were criticisms that the actual replacement rate of public pensions was underestimated. The OECD's average income replacement rate is 42.2%, which is 11 percentage points higher than Korea's.

The income replacement rate is a highly contentious indicator in pension reform discussions. It represents the ratio of pension benefits received in retirement compared to the average income during the pension contribution period, reflecting the security of the pension. Advocates for strengthening income security argue for an increase in the income replacement rate, while proponents of fiscal stability argue for a decrease or maintenance of the current level, leading to intense debates. In particular, those advocating for enhanced security have actively emphasized that the National Pension's income replacement rate is low compared to the OECD average. The National Pension Financial Calculation Committee initially released an interim report excluding proposals to increase the income replacement rate but eventually submitted a reform plan including such proposals to the Ministry of Health and Welfare.

The Ministry of Health and Welfare's request to the OECD to include the Basic Pension in calculating Korea's average public pension income replacement rate stems from the opinion that Korea's public pension replacement rate is underestimated. The OECD calculates the income replacement rate by combining universal Basic Pensions provided to all elderly, minimum guaranteed pensions provided only to lower-income elderly, and public pensions such as the National Pension. Although Korea's Basic Pension falls under the minimum guaranteed pension system provided to the bottom 70%, it has not been included in the calculation of the public pension income replacement rate. In contrast, eight countries including Australia, Sweden, and Canada calculate the income replacement rate including their Basic Pension systems.

The reasons why the OECD excluded Korea's Basic Pension in calculating the pension income replacement rate are complex. Korea's Basic Pension is operated as a system linked with the National Pension, making classification difficult, and the OECD's standards for the income replacement rate, such as the 'average wage of regular employment in the labor market,' do not align well with Korea's situation. A Ministry of Health and Welfare official said, "We have been negotiating to ensure the OECD clearly recognizes the uniqueness of our pension system," adding, "Although there was initial resistance to including it in the standards, I understand that some consensus has been reached."

If the Basic Pension is recognized as a public pension by the OECD, Korea's income replacement rate is likely to increase in the OECD pension report to be published at the end of this year. Oh Geon-ho, chairman of the Policy Committee of the Creating a Welfare State organization, evaluated in 'Reconstructing the Level of Korea's Public Pension Income Replacement Rate' that as of 2020, a Basic Pension of 300,000 won corresponds to an income replacement rate of 7.8 percentage points. A Ministry of Health and Welfare official expressed hope, saying, "If the Basic Pension is included, the international evaluation of the income replacement rate will become more objective and comparable."