[Q&A] How Will the Pension Reform Change with 'Insurance Premium Rate from 9% to 13%'?

Pension Reform Focused on Fiscal Stability
Premiums to Rise Over 16 Years for 20s and 4 Years for 50s

The pension reform plan unveiled by the government on the 4th focused on fiscal stability. The government proposed raising the insurance premium rate to 13% by applying different increase rates for each generation and adjusting the nominal income replacement rate to 42%. While the 20s generation will see the 13% premium rate applied gradually over 16 years, the 50s generation will experience the increase within 4 years. The government also plans to introduce an automatic adjustment mechanism that reflects not only inflation but also changes in the number of subscribers to adjust pension amounts, and will consider raising the mandatory enrollment age.

-How much will the insurance premium rate increase? How will the income replacement rate (the ratio of pension benefits to average income during the subscription period) change?

▲The government decided to raise the current National Pension insurance premium rate from 9% to 13%. However, the time it takes for each generation to reach the 13% premium rate will differ. The rationale is to ensure fairness by considering that younger generations have longer payment periods remaining and face a higher premium burden. The income replacement rate will be adjusted to 42%. According to the previous scenario, the nominal income replacement rate was planned to be adjusted to 40% by 2028, but the government’s plan is to maintain it without further reduction.

-How does the insurance premium burden differ by generation?

▲Those in their 50s (born 1966?1975) will see a 1 percentage point increase annually over 4 years; those in their 40s (born 1976?1985) will have a 0.5 percentage point increase over 8 years; those in their 30s (born 1986?1995) will have a 0.33 percentage point increase annually over 12 years; and those in their 20s (born 1996?2007) will have a 0.2 percentage point increase annually over 16 years. The government explained that this reflects the fact that younger generations have received lower benefit levels due to two previous reductions in the income replacement rate in 1999 and 2008. The lifetime average income replacement rates by generation are 50.6% for the 50s, 45.1% for the 40s, 42.6% for the 30s, and 42.0% for the 20s. If the government plan is finalized and premium increases begin next year, the 50s will pay the 13% premium rate by 2028, the 40s by 2032, the 30s by 2036, and the 20s by 2040.

-If someone in their 20s becomes in their 30s, or someone in their 30s becomes in their 40s, does the increase rate change?

▲No. Even if someone in their 20s enters their 30s, they will follow the original increase schedule set for the 20s.

-Will the mandatory enrollment age increase to 64?

▲Currently, the mandatory enrollment age is 59, and raising it to 64 is under consideration. This is to extend the premium payment period by 5 years, considering increased economic activity participation. However, since older workers face a heavy premium burden after retirement and income gaps after age 60, improvements in employment conditions for older workers, including retirement age extension, will be discussed simultaneously.

-Will pensions be cut if the automatic adjustment mechanism is introduced?

▲Even if the automatic adjustment mechanism is introduced, pension amounts will not be paid lower than the set income replacement rate (42%). However, the benefit amounts will be adjusted compared to the current system. The automatic adjustment mechanism the government plans to introduce will deviate from the current practice of adjusting pension amounts based on inflation and will link pension amounts and eligibility age to demographic changes and economic conditions. Until now, the National Pension has preserved real value by reflecting inflation in pension payments. For example, if inflation is 3%, a pensioner scheduled to receive 100 won would receive 103 won the following year.

However, with the automatic adjustment mechanism, not only inflation but also the 3-year average change rate in the number of subscribers and changes in life expectancy will be considered. If this adjustment rate is 1.5%, the pensioner will receive 101.5 won, which is inflation of 3% minus the adjustment rate of 1.5%.

-When will the basic pension of 400,000 won be paid?

▲It will be gradually increased starting with low-income elderly from 2026. Full payment will begin in 2027. The payment target will be the bottom 70% income group, applying the current criteria.

-How will the basic pension increase affect benefits for basic livelihood security recipients?

▲There will be no reduction in livelihood benefits. The basic pension is deducted from the income recognized for basic livelihood security.

-The government said it will gradually mandate the introduction of retirement pensions. However, small businesses find it difficult to introduce them. What is the plan?

▲For businesses with 30 or fewer employees, the government operates the Small and Medium Enterprise Retirement Pension Fund system. It supports 20% of the contribution for workers earning less than 130% of the minimum wage, and plans to extend this support. Previously, new applications were accepted until August next year, but this will be extended until 2027. Once applied, support will be provided for three years.