[News Terms] You Must Pay Pension for 40 Years to Receive Full Benefits, the Trap of 'Income Replacement Rate'

The pension reform plan chosen by the citizen delegation participating in the public discussion process on the National Pension reform focuses on increasing the income replacement rate from the current 40% to 50%.

[Image source=Yonhap News]

The income replacement rate mentioned here refers to the ratio of the amount received after retirement compared to the lifetime average income, serving as the standard that determines the "amount received" by the subscriber. It is the most commonly used indicator when discussing the level of pension benefits. If the income replacement rate increases, the pension amount that subscribers can receive relatively increases, but the financial stability of the National Pension Fund may become unstable. Conversely, if the income replacement rate decreases, the financial stability of the fund is guaranteed, but the pension amount that subscribers can receive decreases.

In Korea, the National Pension sets the income replacement rate based on a subscription period of 40 years. For example, if a subscriber who has paid National Pension premiums for 40 years has an average monthly income of 2 million won, applying an income replacement rate of 40% means they can receive 800,000 won monthly from the National Pension. If the income replacement rate is raised to 50%, they would receive 1 million won per month.

However, current National Pension recipients do not necessarily receive a pension equivalent to the 40% income replacement rate. This is because the income replacement rate is based on the assumption that premiums have been paid continuously for the maximum subscription period of 40 years. In other words, if the subscription period is less than 40 years, the income replacement rate will be less than 40%. Considering Korea’s current maximum subscription age of 59, one must pay premiums continuously from January (for those born in January) at age 20 until December at age 59 to complete 40 years. The fact that Korea’s actual average income replacement rate is recorded as 31.2%, lower than that of OECD countries, is also due to the shorter subscription period.

When Korea first introduced the National Pension, the income replacement rate was 70% (1988?1998). Subsequently, through pension reforms, the income replacement rate was lowered from 70% to 60% in 1998, and the pension eligibility age was changed from 60 to 65. Then, in 2007, without increasing the pension premium rate of 9% of income, the income replacement rate was revised to be lowered to 40% by 2028 to prevent fund depletion.