US Pension Wealth Hits Record High... Why Korea Can't Escape 'Tiny Amount' [Seungseop Song's Financial Light]

Millionaires Allocate 17% of Income to Pension Accounts Over 26 Years
Most Retirement Pensions Invested in Stocks and Other Products

24% of Korean Pension Recipients Have Less Than 10 Years of Enrollment
88% of Retirement Pensions Left Idle in Savings and Deposits

Elderly people are playing Janggi on the roadside behind Tapgol Park in Jongno-gu, Seoul. The photo is unrelated to the article content. Photo by Heo Younghan younghan@

In South Korea, it has been revealed that the total monthly pension amount for the elderly is only 650,000 KRW.

In the United States, the number of customers with pensions exceeding 1 million USD reached a record high of 485,000.

Recently, news about pensions in South Korea and the United States has emerged. The content was quite different. In the U.S., the news highlighted that the number of people accumulating vast wealth through pensions is gradually increasing. On the other hand, in South Korea, pensions amount to only tens of thousands of won, leading to expressions likening pensions to 'a pittance.' Compared to other developed countries, South Korea’s pensions seem insufficient. Why are pension millionaires common in developed countries but absent in South Korea?

According to Fidelity Investments, in the first quarter, the number of people in the U.S. with 401(k) balances exceeding 1 million USD reached a record high of 485,000. The 401(k) is a type of retirement pension provided by workplaces in the U.S. The number of million-dollar account holders increased by 15% compared to the end of the previous year and by 43% compared to one year ago. As a result, there is even a saying in the U.S. that college graduates who work diligently can easily become pension millionaires.

The situation is similar in Australia, a country known for its wealthy pensioners. By the end of 2021, there were already 20,677 retirement pension accounts exceeding 1 million AUD. The total pension amount is also enormous. Australia’s retirement savings reached 3.85 trillion AUD as of last March, which is 1.5 times the size of Australia’s economy. With approximately 13 million workers in Australia and 10 million retirement pension subscribers, most of the population benefits from pensions.

24% of Pension Recipients Have Not Been Enrolled for 10 Years

However, South Korea’s pensions are woefully insufficient. According to the '2022 Pension Statistics' released by Statistics Korea on the 22nd, the average monthly amount received by elderly people aged 65 and over from the National Pension, Basic Pension, and private pensions was only 650,000 KRW. Six out of ten recipients received less than 500,000 KRW. Although 9.182 million people, accounting for 90.4%, receive pensions, the pension amounts do not adequately support the elderly’s stable livelihood.

Why does this gap exist? First, it is due to differences in enrollment periods. South Korea’s pension system has been in place for a shorter time than those in developed countries. The longer the contribution period, the better the pension benefits. Among National Pension recipients, 24.4% have not been enrolled for even 10 years. About 49.3% have been enrolled for 10 to 20 years. Although the income replacement rate of the National Pension is known to be 40%, this figure is based on a 40-year enrollment period. The average enrollment period for South Koreans is only about 19.2 years.

In contrast, the United States, which is regarded as having the best pension system worldwide, established its retirement pension system in the late 19th century. Both public and private pension systems were well established. Corporate pensions first appeared in 1875 with the American Express company. Australia also has a history of retirement pensions starting in the mid-1800s. Especially with the introduction of the Superannuation system in July 1992, which mandates contributions from employers and employees, a robust pension guarantee system was established.

The secret to the success of pension millionaires is mostly simple: 'saving pensions for a long time.' According to major foreign media, those with 1 million USD pensions at Fidelity saved consistently for 26 years, contributing as much as 17% of their income.

Foreign Retirement Pensions Yield 8%, but South Korea’s Have Averaged 1% Over 10 Years

Pension returns also have a significant impact. South Korea’s retirement pensions have been steadily increasing every year. However, the average annual return over the past 10 years is only 1.93%, which is lower than inflation. The U.S. retirement pension returns are known to consistently record an average annual return of 6-8%. Australia’s retirement pension returns have also reached an average annual return of 8.5% over the past 10 years.

The difference in returns is due to the investment products. U.S. retirement pensions have a stock allocation close to 70%, showing an aggressive attitude toward growing future retirement assets. However, in South Korea, 88.7% of pension assets are concentrated in principal-guaranteed products. Most of these are low-yield products like savings and deposits. Although a default option was implemented to increase operational returns, money still flows more into principal-guaranteed products than performance-driven products.

The government is discussing measures to improve retirement pensions to increase returns. In particular, they are considering creating a fund by pooling corporate and individual retirement pensions, with the National Pension Service participating as an operator to manage it. If such a plan is realized, it is expected that the profitability and safety of retirement pensions will improve, and fierce competition will arise in the pension market.

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