"Daily 85.6 Billion Pension Deficit"... Pension Burden Accumulates as National Assembly Opening Delays [News Explanation]

(20) National Pension Fund Untouched Since 2007
Maintaining Status Quo Accumulates 85.6 Billion KRW Deficit Daily
Delayed National Assembly Opening Increases Deficit Size
Both Parties Agree on Paying More and Receiving More...Only Amounts Differ
Experts: "Maintain Income Replacement Rate and Only Raise Premiums"

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The pension reform, which has been stagnant for 17 years, has been postponed again to the 22nd National Assembly. The Democratic Party of Korea proposed holding a one-point plenary session on the last day of the 21st National Assembly's term to pass the pension reform bill, but the People Power Party argued that a hasty reform is insufficient and suggested forming a tripartite agreement body among the ruling party, opposition, and government in the 22nd National Assembly to discuss it again. As the passage of the reform bill in the National Assembly is delayed, the burden on the public increases. Even if the National Assembly convenes by the statutory deadline of the 7th and immediately processes the pension reform bill, a minimum fund deficit of 856 billion KRW will accumulate.

According to estimates from the Speaker's Office, if the current National Pension system (contribution rate 9%, income replacement rate 40%) is maintained, the fund deficit will increase by 30.8 trillion KRW annually. This means a deficit of 85.6 billion KRW accumulates daily. The contribution rate has been frozen since it rose to 9% in 1998, and the income replacement rate has never increased since 1988 but has only decreased.

The 22nd National Assembly must complete the allocation of standing committee chairpersons and other organizational tasks before it can convene and process bills, with the statutory deadline for organization being the 7th. Even if the plenary session is held immediately on that day to pass and implement the pension reform bill, the public burden will increase by 856 billion KRW compared to if it had been processed at the last plenary session of the 21st National Assembly (on the 28th of last month), which was 10 days earlier. The contribution rate refers to the ratio of contributions to income, i.e., the amount paid, and the income replacement rate refers to the ratio of pension received relative to average income, i.e., the amount received upon reaching pension age.

[Image source=Yonhap News]

However, realistically, it is difficult for the pension amount to change from the day the bill is passed. Moreover, considering that the 14th to 21st National Assemblies had an average of 45 days for organizational formation and remained in a state of suspended operation, the fund deficit is expected to grow further with the delay in bill processing. (Related article: 'Average 45-day delay' National Assembly repeatedly suspends operation, again this time? [News Seolcham]) Currently, the ruling and opposition parties are engaged in a tense power struggle over the allocation of key standing committee chairpersons such as the Legislation and Judiciary Committee, raising concerns that the 22nd National Assembly may also fail to meet the statutory deadline for organizational formation.

Both Ruling and Opposition Propose 'Pay More, Receive More'... But Depletion is Inevitable

Introduced in 1988 with a 'contribution rate of 3% and income replacement rate of 70%', the National Pension was changed to a 'contribution rate of 9% and income replacement rate of 60%' under the Kim Dae-jung administration in 1998. After the Roh Moo-hyun administration lowered the income replacement rate to 40% in 2007, the National Pension reform has remained stagnant for 17 years without change.

In the 21st National Assembly, the ruling and opposition parties agreed on raising the contribution rate from the current 9% to 13%, but failed to reach consensus on the income replacement rate (currently 40%). Initially, the People Power Party proposed raising the income replacement rate to 43%, while the Democratic Party suggested 45%. Later, the Democratic Party shifted its position to accept the People Power Party's mediation proposal (income replacement rate 44%) to process the pension reform bill within the 21st National Assembly's term.

However, the People Power Party argued that the mediation proposal with an income replacement rate of 44% is premised on structural reform (overhauling the entire pension system including basic, retirement, and occupational pensions to ensure the sustainability of the National Pension) and suggested forming a tripartite consultative body among the ruling party, opposition, and government in the 22nd National Assembly to discuss it.

The ideal solution is 'structural reform' as advocated by the government and ruling party. However, since it requires comprehensive reform of systems such as basic, retirement, and occupational pensions, it takes a long time to gather public opinion, prepare plans, and reach consensus. Therefore, in the 21st National Assembly, discussions began to first implement 'parametric reform' (adjusting contribution rates, income replacement rates, pension age, etc. to delay fund depletion) to at least put out the 'urgent fire.'

How Much Benefit Would Individuals Gain if the Ruling and Opposition Reform Bills Pass?

Under the current system with a contribution rate of 9% and income replacement rate of 40%, a salaried worker with an average monthly income of 1 million KRW will receive a pension amount of 400,000 KRW upon reaching pension age after 40 years of enrollment. Although it is common for wages to vary over a lifetime, for calculation convenience, assuming the monthly wage equals the average monthly income, the monthly contribution paid is 45,000 KRW on average. The other half, 45,000 KRW, is borne by the company. For a regional subscriber with the same average income, the individual must pay the full 90,000 KRW.

In the case of salaried worker Mr. A, who has an average monthly income of 5 million KRW, he currently pays an average of 225,000 KRW monthly under the current system. The other half is paid by the company. After 40 years of enrollment, when Mr. A reaches pension age, he will receive a monthly pension of 2 million KRW.

If the ruling and opposition reform bills with a contribution rate of 13% pass in the National Assembly, Mr. A will pay 325,000 KRW monthly. However, the amount received differs due to different income replacement rates. If the People Power Party's Plan 1 (income replacement rate 43%) is implemented, he will receive 2.15 million KRW monthly; if the Democratic Party's plan (income replacement rate 45%) passes, he will receive 2.25 million KRW monthly. He will pay an average of 100,000 KRW more monthly and receive 150,000 KRW or 250,000 KRW more, respectively.

From this, both parties' pension reform plans appear to benefit individuals at least. Although the purchasing power of money will change by the time pension age is reached, simply considering the amounts, the money received exceeds the money paid.

Members of the Public Pension Strengthening National Action gathered on the morning of April 18 in front of the National Assembly in Yeouido, Yeongdeungpo-gu, Seoul, urging an increase in the National Pension income replacement rate and strengthening of state responsibility. [Image source=Yonhap News]

However, applying this to the entire country could be problematic. Even if the income replacement rate is raised so that individuals receive just 100,000 KRW more monthly, with 5 million beneficiaries, the amount the state must pay back is 500 billion KRW monthly. As of December last year, there were about 5.46 million National Pension beneficiaries, and the number is expected to increase due to aging. If the People Power Party's initial plan passes, the fund will be depleted by 2064; if the Democratic Party's plan is implemented, depletion will occur by 2063.

The reason the fund depletes even if the reform plans are implemented is that both parties' proposals are 'pay more, receive more' plans. To sustain the National Pension system, it would be ideal to pass a 'pay more, receive less' plan to share the burden across generations, but it seems such reform plans were avoided due to concerns over worsening public opinion. For example, French President Emmanuel Macron faced fierce protests when he changed the pension age from 62 to 64 last year.

In this regard, Yoon Seok-myung, Honorary Research Fellow at the Korea Institute for Health and Social Affairs, argues that the income replacement rate should be maintained while only raising the contribution rate. This is the so-called 'pay more, receive the same' plan. At a pension research seminar on the 28th of last month, Honorary Research Fellow Yoon explained, "Raising the income replacement rate is not pension reform but pension deterioration," and "If the income replacement rate is 44%, the contribution rate must be 21.8%, not 13%, to avoid passing debt to future generations." He further suggested, "The income replacement rate should be maintained at 40%, and the contribution rate should be raised to 12-15%. Raising the contribution rate to at least 12% is necessary to serve as a proper stepping stone for structural reform."