[Issue Analysis] Where Is the 국민연금 Reform Heading... Income Replacement Rate 43% vs 45%, Calls for "Separation of New and Old Pension"

In-depth Analysis of National Pension Reform Scenarios
Consensus on Premium Rate Increase Between Fiscal Stability and Income Security Theories

As the task of reforming the National Pension has been passed on to the 22nd National Assembly, there is a growing call to more thoroughly review the various reform scenarios discussed so far and adopt the model best suited to Korea's situation.

According to the 5th financial projection by the National Pension Financial Projection Expert Committee on the 16th, the National Pension will run a deficit starting in 2041, and the pension fund will be depleted by 2055. Compared to the financial projection five years ago, the depletion point has been moved up by two years, and the deficit transition point by one year. The committee created six scenarios with different population forecasts and economic variables but stated that there was no change in the fund depletion timing.

Therefore, there is no disagreement that the current National Pension structure cannot remain as is if stable pension payments are to continue beyond 2055. However, opinions sharply diverge on how to secure the pension's stability.

In the 21st National Assembly, negotiations between ruling and opposition parties in the Pension Reform Special Committee ultimately failed. Both sides agreed to raise the contribution rate from 9% to 13%. However, the People Power Party insisted that the income replacement rate could only be increased up to 43% for fiscal stability, while the Democratic Party argued it should be 45% to ensure retirement income security, and they could not reconcile their differences.

Earlier, 500 citizens selected as the deliberation panel under the National Assembly Pension Special Committee's Public Deliberation Committee finalized the option last month to "pay more (increase contribution rate to 13%) and receive the same (maintain income replacement rate at 40%)." However, the government expressed concerns about fiscal stability and effectively opposed this option.

Possible to Raise Income Replacement Rate to 50% with National Budget... Replacement Rate Must Increase to Reduce Elderly Poverty

The most representative difference in positions surrounding pension reform can be seen through the two options presented to the citizen deliberation panel by the Public Deliberation Committee under the National Assembly Pension Special Committee. One is the fiscal stability argument emphasizing the sustainability of pension finances, and the other is the income security enhancement argument prioritizing retirement income protection. Although their views differ, they agree on one point: since the current 9% contribution rate cannot remain unchanged, some form of 'parameter reform' to raise the contribution rate is necessary. Structural reform requires long-term discussion, so adjusting parameters to buy time is the consensus.

The difference lies in how much to raise the income replacement rate. The "pay more, receive more" option (raising the contribution rate from 9% to 13% and increasing the income replacement rate from 40% to 50%) presented during deliberations represents the income security advocates' logic, who consider current fiscal concerns exaggerated. They start from the premise that if the government actively addresses low birth rates and aging, the fund may not be depleted by 2055. They argue that raising the income replacement rate will reduce elderly poverty and help stimulate domestic demand in an aging future.

Income security advocates believe that even if the National Pension fund is depleted, it is feasible to resolve the issue by injecting national finances. They argue that if the pension fund is exhausted, expenditures needed that year can be covered by that year's contributions and government subsidies through a pay-as-you-go system. They estimate that at the fund depletion point in 2055, a contribution rate of about 26.1% would be required to pay pensions, but with 1% of GDP in government subsidies, it could be reduced to 22.4%, and with 2% of GDP subsidies, down to 18.6%. Furthermore, if the income replacement rate is raised from 40% to 50%, total National Pension expenditure relative to GDP in 2082 is estimated at a maximum of 11.8%. Although this is 2.3 percentage points higher than maintaining the current system, they argue this burden is manageable given the size of the Korean economy.

Covering Pension Shortfalls with Public Funds Imposes Heavy Burden on Future Generations... Support Needed for Low-Income Contributors Unable to Pay

On the other hand, fiscal stability advocates consider these estimates overly optimistic. They point out that considering the National Pension expenditure is 2.1% of GDP next year, 11.8% in 2082 would be a very heavy burden. They also argue that taxes required to cover pension shortfalls through public funds would be a burden on future generations, so government subsidies are not a viable solution. Moreover, they emphasize the need to consider increasing medical expenses due to aging.

They particularly argue that raising the income replacement rate to 50% will not effectively solve elderly poverty in the future. They claim there is little correlation between increasing the National Pension income replacement rate and improving income for impoverished elderly. Many impoverished elderly either do not meet the minimum 10-year contribution requirement and are outside the system or have low income and short contribution periods even if eligible. Since income and contribution period are key variables determining pension amounts, the effect of raising the income replacement rate mainly benefits those who have consistently paid contributions through employment. Thus, raising the nominal income replacement rate ultimately concentrates benefits on high-income recipients with long contribution periods. For this reason, fiscal stability advocates believe that instead of raising the income replacement rate, system improvements such as supporting contributions for low-income regional subscribers like small self-employed workers who cannot pay contributions are necessary.

Parameter Reform Has Limits for Fiscal Stability... Separate Old and New Pensions to Secure Fund Stability

Although income security and fiscal stability advocates differ, they agree on one point: 'parameter reform must be done first.' However, the Korea Development Institute (KDI) criticized that merely adjusting parameters without structural reform only delays the fund depletion point slightly and is not a stable solution to improve intergenerational equity. KDI researchers Kanggu Lee and Seungryong Shin argue for introducing a defined contribution (DC) new pension that guarantees an expected return ratio of 1 (sum of contributions paid and expected fund operation returns) after suspending the old pension at a certain point.

KDI suggests that the fiscal shortfall arising from paying pensions under the current old pension account can be sufficiently managed through temporary government fiscal injections. Although a fiscal burden of about 1-2% of GDP is expected for approximately 13 years from the anticipated old pension fund depletion point, this burden is projected to almost disappear after 2080. In this case, the new pension aiming for an expected return ratio of 1 would require raising the contribution rate only up to 15.5% to maintain the current 40% income replacement rate.

KDI focuses on fund stability. To reduce uncertainty in pension payments, they argue for adopting a benefit calculation method where payments automatically adjust according to demographic or environmental changes. Currently, a defined benefit (DB) system is used, where benefits are predetermined based on contribution and work history. For the new pension, they propose introducing a defined contribution (DC) system where benefit amounts are determined at the start of receipt based on contributions, investment returns, and life expectancy. This approach would secure fiscal stability more robustly than the current system and reduce resistance to gradual contribution increases.

Integrating National Pension, Government Employees' Pension, Military Pension, and Private School Teachers' Pension Would Enhance Equity in Pension Reform

Another structural reform proposal exists. It is the public pension integration plan proposed by Ahn Cheol-soo, a member of the People Power Party. The argument is that before reforming the National Pension, occupational pensions such as government employees', military, and private school teachers' pensions should be changed or integrated for equity. Since the government employees' pension is designed more favorably than the National Pension, this issue should be addressed first. Currently, the three special occupational pensions have different contribution rates, benefit levels (income replacement rates), government and employer burden ratios, and pension starting ages. The proposal is to unify these based on the National Pension standards to improve fairness. There have been criticisms that occupational pensions are more advantageous than the National Pension and that pension amounts are higher compared to other advanced countries like Germany, the United States, and Japan.

However, during the public pension integration process, vested rights before reform would be recognized, but after reform, all public pension subscribers would be subject to the same standards regardless of subscription timing. The plan is not to merge subscribers, finances, or organizations (National Pension Service, Government Employees Pension Service, Private School Teachers Pension Service, Military Pension Service) but to align contribution rates and income replacement rates with those of the National Pension to enhance fairness.