[why&next] Pension Reform Plan to 'Appease the Youth Generation'... Concerns Over Worsening Generational Conflict

Differentiation of Insurance Premium Rates by Generation
No Global Cases of Implementation
First Serious Discussion on Automatic Stabilizers
High-Intensity Insurance Premium Increases Inevitable

The pension reform plan directly revealed by President Yoon Suk-yeol centers on ‘differentiated premium increases by generation’ and the ‘introduction of an automatic stabilization mechanism.’ The plan aims to secure fairness between generations by adjusting the premium rates so that middle-aged and older generations pay higher rates than the youth, and to preempt conflicts over parameter reforms by establishing a mechanism that automatically adjusts premium rates in line with demographic changes.

The differentiated premium increase by generation is a measure rarely seen worldwide and is being discussed for the first time in Korea. The automatic stabilization mechanism has also never been seriously discussed before. Among experts in academia and elsewhere, the reform direction emphasizing fiscal stability is viewed positively, but there is a diagnosis that if the automatic stabilization mechanism is introduced, high-intensity premium hikes will be inevitable, potentially sparking social controversy surrounding pension reform. Civic groups have raised concerns about the generational premium increases, signaling anticipated difficulties in the discussion process.

The pension reform plan presented by President Yoon on the 29th through a government briefing focuses on fiscal stabilization. The ‘differentiated premium increase by generation’ aims to reduce resistance from the younger generation, who will have to continuously pay pensions in the future, by differentiating the speed of premium rate increases between the youth and middle-aged generations. For example, if the premium rate is to be increased by 13?15%, the middle-aged group would see a 1 percentage point increase annually, while the youth would see an increase of 0.5 percentage points annually or more, applying the premium rates at different times.

This is a measure to ease the resistance of the generation that will have to continuously pay pensions in the future. President Yoon stated, “We will pursue reforms that the younger generation, who pay premiums the longest and the most but receive pensions the latest, can accept,” revealing this plan. At a time when reducing resistance from the younger generation is crucial to securing future pension fiscal stability, this is regarded as a progressive proposal.

Oh Geon-ho, Policy Committee Chair of the Creating a Welfare State, said, “Our country has had issues of fairness regarding differences in benefits and contributions by generation,” adding, “The middle-aged and older generations received a high income replacement rate in the past, but their premium rates were not high.” He continued, “On the other hand, since the youth will have to face continuously rising premium rates in the future, applying differentiated premium rates for a certain period is a positive proposal worth considering.”

However, resistance from the middle-aged and older generations, who will be subject to relatively higher premiums, could become a burden. There is criticism that grouping people solely by age, despite differing socioeconomic conditions such as employment types within the same generation, is unfair. The People’s Solidarity for Participatory Democracy issued a statement pointing out, “Differentiated premium increases undermine intergenerational solidarity and may fuel intergenerational conflicts formed through exaggerated controversies surrounding the system.”

‘Automatic Stabilization Mechanism’ Adjusting Premium Rates Linked to Demographics... Concerns It May Drain Momentum from Pension Discussions

There are also many concerns among experts about the introduction of the automatic stabilization mechanism. In Korea, where old-age income security is unstable, excessively high-intensity reforms may actually hinder pension reform discussions.

The automatic stabilization mechanism is a plan to automatically adjust system parameters such as premium rates and income replacement rates in connection with demographic and economic conditions. It is a system that reflects the number of subscribers, beneficiaries, and unemployed in the pension calculation formula. For example, if the number of pension subscribers decreases due to aging and unemployment, pensions can be reduced accordingly. The purpose is to reduce the social costs and burdens of adjusting premium rates and income replacement rates each time to fit reality, preventing repeated controversies whenever parameter adjustments are needed.

Chairman Oh said, “While such a mechanism could play an effective role in Western pensions that have already achieved some balance within the system, in a system like the National Pension with significant fiscal imbalance, installing an automatic adjustment mechanism would entail extremely high-intensity reforms.” He added, “Rapid premium rate hikes would be inevitable, which could deepen social controversies and conflicts surrounding pension reform.” For this reason, he explained that the automatic stabilization mechanism should be introduced only after pension reform centered on premium rate increases has been carried out.

The Civic Group for Strengthening Public Pensions also argued, “The automatic stabilization mechanism is a means of pension cuts and cannot be introduced given the serious elderly poverty and low pension benefit levels.” Furthermore, they pointed out, “Broad political consensus is required during the introduction process, and if introduced without consensus, it often cannot be sustained; even when introduced with considerable consensus, additional political intervention is necessary.”

President Yoon also announced plans to simultaneously pursue reforms of the basic pension, retirement pension, and private pensions. He expressed his intention to stably guarantee the income of the elderly, who would be relatively disadvantaged by the National Pension parameter (premium rate and income replacement rate) reforms.

Regarding private pensions, President Yoon said, “We will provide tax incentives,” and concerning the basic pension, he clearly promised, “I pledge to raise it to 400,000 won per month during my term.” He especially noted, “Currently, elderly people living alone receiving 710,000 won per month in livelihood benefits will see those benefits reduced by the amount of the basic pension they receive,” and announced, “We will pursue a plan to additionally pay the ‘reduced amount’ to guarantee the old-age living of these elderly.” This means revising the so-called ‘basic pension that is given and then taken away’ system, which reduces livelihood benefits for low-income elderly receiving the basic pension.