IMF "Without Pension Reform, Government Debt Will Double GDP in 50 Years"

IMF Annual Consultation Report
"National Pension Proposed to Integrate with Occupational Pensions"

The International Monetary Fund (IMF) emphasized the need for pension reform, stating that if there are no changes to pension policies in the future, the South Korean government debt will reach twice the size of the Gross Domestic Product (GDP) by 2075.

According to the IMF's annual consultation report on South Korea released on the 19th, if the current pension system is maintained, public sector debt is expected to increase to about 200% of GDP by 2075. This assumes that the government will continuously cover the deficits of the National Pension for more than 50 years without any changes to pension policies.

Herald Finger, head of the IMF mission, explained, "The public sector debt in the report includes only central government debt," and added, "The projections also considered legislated pension reforms." Even considering the current pension system, which delays the starting age for National Pension benefits to 65 for those born after 1969 and lowers the income replacement rate to 40%, the increase in government debt due to aging cannot be prevented.

South Korea's old-age dependency ratio is projected to be 80 by 2050, surpassing Japan to become the most aged country among OECD member states. The old-age dependency ratio refers to the ratio of the elderly population per 100 working-age people. Aging acts as a factor increasing pension expenditures, with pension spending as a percentage of GDP rising from 1.8% in 2009 to 4.0% last year.

The IMF also pointed out the problem of relatively high elderly poverty rates due to the low adequacy of pension benefits in South Korea. Therefore, pension reform is necessary, considering the long-term fiscal sustainability and alleviation of old-age poverty. Specific measures to implement this include raising pension contribution rates (insurance premiums), extending retirement age, and lowering the pension income replacement rate. However, since lowering the pension income replacement rate negatively affects benefit adequacy, it was advised to consider measures such as increasing the basic pension to address elderly poverty.

International Monetary Fund (IMF) [Photo by Yonhap News]

The IMF proposed the long-term integration of the National Pension with other occupational pensions. Operating separate pension systems causes equity issues, reduces labor market mobility, and is administratively inefficient. Additionally, the IMF recommended considering measures to increase tax revenue and rationalize expenditures to address long-term fiscal challenges caused by population aging. This includes reducing income tax deductions, raising value-added tax (VAT), and rationally managing tax expenditures for industries and small and medium-sized enterprises.

Furthermore, the IMF pointed out the financial soundness issues of energy public enterprises and stated that domestic energy prices, such as electricity rates, should be linked to international raw material prices. The high energy costs caused by last year's surge in international raw material prices were not sufficiently passed on to domestic consumers, resulting in huge losses for Korea Electric Power Corporation and Korea Gas Corporation. Along with this, the IMF recommended not extending the fuel tax reduction measure, which was extended until the end of this year.