[Insight & Opinion] The True Meaning Behind the National Pension Reform Debate

Designed Based on a 40-Year Contribution Period
Must Be Viewed Alongside Employment Issues
Corporate and Private Pensions Also Failing to Fulfill Their Roles

On the 23rd, there has been a heated debate among welfare experts, ruling and opposition parties, and different age groups over the survey results supporting the reform plan of ‘pay more and receive more’ proposed by the citizen delegation of the Public Opinion Committee under the National Assembly’s Special Committee on Pension Reform. On one side, voices of concern are rising, warning that it will impose a tremendous burden on future generations, while on the other side, there is support, arguing that it is an inevitable choice to ensure income security. It is also known that there are differences of opinion not only among the public but also among pension scholars.

In fact, I believe that no matter which plan is decided, the controversy will not subside. There are several reasons, but fundamentally, Korea’s National Pension Service is structurally incapable of providing the level of retirement income security that people desire. The nominal income replacement rate of the National Pension is 40%, which is based on a 40-year contribution period. Realistically, how many people can work for 40 years? Moreover, the situation does not seem likely to improve significantly in the future. In Korea, with a university enrollment rate exceeding 70%, the actual starting age for working life is at best around 25. Although the legal retirement age is 60, in reality, it is around 55. Even if one starts working immediately after graduating from university and works until 55, the contribution period is only 30 years. This is a 10-year difference from the 40-year standard. From the perspective of compound interest, 10 years can make a huge difference in returns. Due to the gap between the originally set values and reality, the National Pension cannot be satisfactory regardless of the direction of reform. One might argue that it should have been properly designed from the start. This is a typical hindsight. After the fact, everything is clear and everyone can be an expert. How many people at the time could have predicted the current situation?

It would be ideal if retirement could be prepared solely with the National Pension, but realistically and rationally, that is not the case. Corporate retirement pensions and private pensions must also be considered. The more individuals save and invest for retirement, the less the national burden will be in the long term. The problem is that corporate retirement pensions and private pensions are not functioning properly either. Corporate retirement pensions serve more as lump-sum payments rather than pensions. The rate of lump-sum withdrawals by subscribers is as high as 90%. The reasons are easy to guess: they are likely used for children’s education expenses, loan repayments, and children’s wedding costs. Although private pension contributions are increasing slightly every year, the amounts are not large. The annual subscription limit and tax deduction limit for private pensions (pension savings accounts) are 18 million KRW and 9 million KRW respectively, but the average contribution per person is about 2.62 million KRW (as of 2021, Financial Supervisory Service).

If the current situation continues, not many people will be able to prepare for retirement with pensions alone. Therefore, pension issues cannot be solved by pensions alone and must be viewed together with employment issues. In Korea, since the duration of staying in main jobs is relatively short, the reality is that people have to work longer.

Although it may seem that many problems will be solved if the system changes, a closer look reveals that this is rarely the case. Public pension systems, not only in Korea but worldwide, are indispensable but not perfect. Individuals must fill in the gaps themselves. To do so, corporate retirement pensions and private pensions must function properly, and the government must provide more incentives to encourage people to make greater efforts for their own retirement. Incentives for retirement preparation can never be excessive.

Sang-geon Lee, Head of Mirae Asset Investment and Pension Center