"Reforming 국민연금 to 'Receive More' Without Changing the Income Replacement Rate" [Issue Interview]

Yoon Seok-myeong, Honorary Research Fellow at Korea Institute for Health and Social Affairs

The political turmoil over pension reform continues. The Democratic Party of Korea has announced its acceptance of a bipartisan compromise plan (insurance premium rate 13%, income replacement rate 44%), but the People Power Party has called for structural reform and is adjusting the pace. In this context, the Korea Development Institute (KDI)'s proposal to bifurcate the National Pension into a new pension and an old pension is being discussed.

Yoon Seok-myung, Honorary Research Fellow at the Korea Institute for Health and Social Affairs, said in an interview with Asia Economy on the 4th, “Both plans have fatal problems,” adding, “They either leave astronomical debts to future generations or shift the pain of pension reform onto them.” Regarding the bipartisan compromise plan, he criticized, “The reform is proposed because of shortcomings, but instead of reducing the debt, it seems to increase it under the name of reform,” and said, “Even raising the income replacement rate by 0.1 percentage points is not a reform but a ‘deterioration’.” He explained, “Instead, support for vulnerable groups should be provided through tax input such as basic pensions, and fiscal stability can be achieved by reducing monthly and annual pension payments according to increased life expectancy.”

Mr. Yoon is a pension expert who participated in all five National Pension Financial Projection Committees (2003?2023). He has been involved in the entire pension reform discussion process since the 1997 National Pension System Improvement Planning Group. He is regarded as an expert who emphasizes the financial stability of pensions.

Yoon Seok-myung, Honorary Research Fellow at the Korea Institute for Health and Social Affairs, is being interviewed by Asia Economy. Photo by Yoon Dong-joo doso7@

- What is the current state of the National Pension?

▲The pension finances are deteriorating significantly. According to the results of the 5th National Pension Financial Projection, if the current system (insurance premium rate 9%, income replacement rate 40%) is maintained, the reserve fund will increase until 2040, reaching a maximum of 1,755 trillion won, and will be depleted by 2055. The money that disappears at that time is not only the 1,755 trillion won in reserves. The fund management returns and newly incoming insurance premiums will also vanish. Combined, these amount to about 1,000 trillion won, so when the pension is depleted, 2,755 trillion won will evaporate.

Even if the income replacement rate remains at the current 40% but the insurance premium rate is raised by 6 percentage points to 15%, the finances remain unstable. The fund depletion point is delayed to 2071, about 16 years later, but unfortunately, even this calculation is more optimistic than reality. At that time, the National Pension Financial Projection Expert Committee assumed that the total fertility rate (the number of children a woman is expected to have in her lifetime) would rebound to 1.21 between 2030 and 2040. Given that the current total fertility rate is around 0.6 to 0.7, is it possible for it to double within a few years?

- Can the pension problem be solved with the reform plan proposed by the National Assembly?

▲If the insurance premium rate and income replacement rate are raised to 13% and 44%, respectively, as proposed in the bipartisan compromise plan, implicit debt will surge. The insurance premium rate that achieves long-term fiscal balance without passing on further debt to future generations is called the balanced insurance premium rate. When the income replacement rate is 44%, the balanced insurance premium rate is about 22%. This is 9 percentage points higher than the compromise plan (13%). In other words, it is obvious that an additional insurance premium debt equivalent to 9 percentage points annually will be passed on to future generations. The reform is proposed because of shortcomings, but instead of reducing the debt, it seems to increase it under the name of reform. Even raising the income replacement rate by 0.1 percentage points is not a reform but a ‘deterioration’.

- The average monthly National Pension payment is in the 600,000 won range. Is there a way to increase the ‘amount received’?

▲The income ceiling of the National Pension should be raised. Currently, the upper limit of the standard monthly income (the monthly income reported by the insured to calculate the pension amount) for National Pension insurance premiums is about 6 million won. This means that even if one earns more than 6 million won per month, insurance premiums are paid based on this ceiling. This is considerably lower than other public pensions such as the Government Employees Pension. If the National Pension’s standard monthly income is raised to the Government Employees Pension level (8.6 million won), a considerable pension can be received even with an income replacement rate of 40%.

- What about low-income groups? There are voices calling to raise the income replacement rate to address elderly poverty.

▲Sweden in 1998, which separated pension policy and social policy, is a good example. Pension policy ensures sustainability by allowing people to receive only what they paid, while social policy guarantees a minimum standard of living for vulnerable groups through tax input. Korea should also address elderly poverty through selective systems such as the basic pension. The core of elderly poverty is income and asset polarization. The top 10% wealthy elderly are the richest group in Korea, benefiting from rapid economic growth, but the bottom 25% are the most miserable group across all age groups. Therefore, universal welfare like the National Pension cannot solve the problem of elderly poverty.

Raising the income replacement rate may rather deepen polarization. An analysis of expected subscription periods by income deciles shows that the poor in the 1st decile have 19.3 years, while the wealthy in the 10th decile have 33.9 years. Since the National Pension’s structure increases the amount received with longer subscription periods, the benefits of raising the income replacement rate are likely to go to the wealthy. Also, it should be understood that raising the income replacement rate does not solve the problem immediately. Even if the income replacement rate is raised today, it takes about 40 years for the effect to be fully realized. This means that poor elderly people now cannot benefit immediately.

Shin Seung-ryong, Associate Research Fellow of the Fiscal and Social Policy Research Department at KDI, is attending the "National Pension Reform Direction Forum" hosted by KDI and the Korean Economic Association at the Press Center in Jung-gu, Seoul on the 23rd, presenting on the topic of "Complete Funded National Pension Structural Reform Plan." Photo by Kang Jin-hyung aymsdream@

- What do you think about KDI’s proposal to divide the pension into a new pension and an old pension for fiscal stability?

▲There is a fatal problem of intergenerational equity. KDI’s proposal is to newly accumulate insurance premiums collected from the pension reform point onward into a new pension account. The old pension premiums paid before the reform would be managed separately, and if fiscal shortages occur in the old pension due to low birth rates and aging, they would be resolved by government budget input. This grants an exemption to the elderly generation. If the government repays the fiscal burden of the old pension, existing beneficiaries or those about to start receiving benefits do not bear the pain and would say “thank you.” Conversely, the younger generation would have to bear 2 to 3 times more burden alone for a pension system they might never receive in the future. Would they be happy about that?

- Then, how should the National Pension be reformed?

▲The direction of pension reform should be to eliminate concerns about the National Pension’s finances for at least 30 years and up to 70 years. Adopt the Finnish-style life expectancy coefficient. When average life expectancy increases, monthly and annual pension payments automatically decrease. However, the total pension amount paid to one beneficiary over their lifetime by the National Pension Service remains the same. Applying the life expectancy coefficient allows the elderly generation to share the pain of pension reform while greatly improving fiscal stability. This is because increased life expectancy is a major factor in fiscal instability. The National Pension Service expected beneficiaries to receive pensions for about 20 years, but the current pension receipt period has increased to 25?30 years.

Also, it is necessary to keep in mind the implicit debt of 1,825 trillion won mentioned earlier. Wouldn’t young generations have hope if the implicit debt stops at 1,825 trillion won or increases only slightly? The goal should be to keep the income replacement rate the same while not increasing the debt burden.

- Do you have any requests for the government and the National Assembly?

▲In soccer, besides the first and second halves, there is injury time (additional time allowed at the referee’s discretion after regular match time). Delaying the fund depletion point by 5 to 6 years through pension reform is like scoring 1 or 2 goals in the first half. The second half and injury time remain. Since average life expectancy has increased much more than expected, pension reform should be approached with careful consideration of how long the injury time will be. At this time, all information related to pensions should be shared with the public. The implicit debt of the National Pension was disclosed only after long demands and pressure. Meeting minutes related to pension reform should be posted, and the Government Employees Pension’s financial projection results should also be announced.

About Yoon Seok-myung, Honorary Research Fellow at the Korea Institute for Health and Social Affairs...

Born in 1961, he graduated from Korea University with a degree in English Language and Literature and earned a Ph.D. in Economics from Texas A&M University in the United States. He has served as a member of the 1st to 5th National Pension Financial Projection and System Development Committees, a member of the Government Employees Pension Financial Calculation Committee, chairman of the Basic Old-age Pension Financial Projection Committee, and president of the Korean Pension Society. He currently serves as an Honorary Research Fellow at the Korea Institute for Health and Social Affairs.