[News Terms] The Gauge of National Pension Reform, ‘Contribution Rate · Income Replacement Rate’

The National Assembly's Special Committee on Pension Reform has condensed the proposed reforms for the National Pension Service into two options: either raising the contribution rate and slightly increasing the income replacement rate, or keeping the income replacement rate unchanged.

Here, the contribution rate refers to the percentage of a subscriber's monthly income paid into the National Pension. Simply put, it represents the portion of a subscriber's monthly salary that is deducted for the pension. A higher contribution rate means a larger monthly payment to the National Pension, while a lower rate means a smaller payment.

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When the National Pension was introduced in 1988, the contribution rate was 3% of monthly income, but it was increased by 3 percentage points every five years, reaching 9% in 1998, and has remained at that level since. The contribution a subscriber must pay is determined by multiplying the standard monthly income by the 9% contribution rate. In the case of workplace subscribers, the employee and employer each pay half of the contribution, while regional subscribers pay the full amount themselves. For example, a worker earning 3 million KRW per month would pay 270,000 KRW (9% of their salary), with both the employee and employer contributing 135,000 KRW each.

However, the contribution rate is applied within the upper and lower limits of the standard monthly income used to calculate the National Pension contributions. If income exceeds the upper limit, the subscriber pays the maximum contribution corresponding to the upper limit. Conversely, if income is below the lower limit, the subscriber pays the minimum contribution corresponding to the lower limit. The standard monthly income is determined according to Article 5 of the Enforcement Decree of the National Pension Act, reflecting the average income variation rate of all subscribers over the past three years. The upper limit of the standard monthly income applied until the end of June is 5.9 million KRW, and the lower limit is 370,000 KRW.

The income replacement rate is the ratio of the pension amount received after retirement to the average lifetime income, serving as the standard for determining the "amount received" by subscribers. It is the most commonly used indicator when discussing pension benefit levels. A higher income replacement rate means subscribers receive a relatively larger pension amount, but the financial stability of the National Pension Fund may be compromised. Conversely, a lower income replacement rate ensures the fund's financial stability but reduces the pension amount subscribers receive.

South Korea's National Pension sets the income replacement rate based on a 40-year subscription period. For example, if a subscriber who has paid contributions for 40 years has an average monthly income of 2 million KRW, applying an income replacement rate of 40% means they would receive 800,000 KRW monthly from the pension. If the income replacement rate is raised to 50%, the monthly pension would increase to 1 million KRW. When the National Pension was first introduced, the income replacement rate was 70% (1988?1998). It was then reduced to 60% from 1999 to 2007, and since 2008, it has been gradually lowered by 0.5% annually from 50%, aiming to reach 40% by 2028.

Meanwhile, the Public Deliberation Committee under the National Assembly's Special Committee on Pension Reform recently adopted two reform proposals at a workshop for agenda deliberation: raising the contribution rate from the current 9% to 13% and increasing the income replacement rate from 40% to 50%, or raising the contribution rate to 12% while maintaining the income replacement rate at 40%. The Ministry of Health and Welfare predicts that if the current contribution and income replacement rates are maintained, the National Pension Fund will be depleted by 2055. However, if the proposal to raise both rates is adopted, the depletion date is expected to be postponed to 2062, a delay of seven years. If only the contribution rate is increased, the fund depletion is projected to be delayed until 2063, eight years later.