National Pension Reform, Premium Increase and Income Replacement Rate Maintenance Expected... Generational Conflict Deepens [AK Radio]

4% Increase in Insurance Premium Rate, Maintaining 42% Income Replacement Rate
Younger Generation Must Pay More in Total... Ongoing Generational Conflict

Since the announcement of the National Pension reform plan, various discussions and debates have continued. On the 4th, the government unveiled the pension reform plan aimed at securing the financial soundness of the National Pension. This is the first pension reform plan announced in 21 years since 2013, drawing national attention to the future changes in the National Pension system.

The core of the reform plan announced by the government is to raise the National Pension contribution rate from 9% to 13% while maintaining the income replacement rate at 42%. The current contribution rate of 9% has remained unchanged for 26 years since 1998. Concerns have grown that the pension fund will soon be depleted, and this reform plan includes measures to address this issue. In particular, the plan discusses differentiating the contribution rate increase by generation, applying different rates for younger and middle-aged groups.

Regarding the contribution rate increase, subscribers in their 50s will see a 1 percentage point increase annually, those in their 40s will have a 0.5 percentage point increase, those in their 30s a 0.3 percentage point increase, and those in their 20s a 0.25 percentage point increase. For example, subscribers in their 20s will reach a 13% contribution rate over 16 years, while those in their 50s will reach 13% in just 4 years. Although there have been complaints that younger generations will pay more in total contributions, some argue that considering inflation rates, the burden gap between generations is not significant.

Additionally, the reform plan is considering the introduction of an ‘automatic adjustment mechanism’ for National Pension payments. This mechanism adjusts pension payments based on factors such as life expectancy and the number of subscribers, including reducing pension payments if life expectancy increases and the number of subscribers decreases. This system is currently adopted by 24 OECD member countries, but in Korea, some believe it is premature to introduce it due to the low income replacement rate.

[Image source=Yonhap News]

The reform plan also includes measures to legally guarantee National Pension payments. This is to dispel concerns that even after paying National Pension contributions, the fund might be depleted and pensions might not be received later. Furthermore, the mandatory upper age limit for National Pension enrollment is proposed to be extended from 59 to 64 years. This measure considers the increase in elderly workers and longer life expectancy in an aging society, but there are concerns about the increased burden on middle-aged groups.

Basic pension is also included in the reform plan. The current basic pension of 300,000 won will be increased to 400,000 won for elderly people with income below 50% of the median income by 2026, and in 2027, it will be expanded to cover all basic pension recipients in the bottom 70% income bracket. Additionally, measures to improve the issue where recipients of the basic living security system see reductions in livelihood benefits when receiving the basic pension have been proposed.

The military service and childbirth credit systems will also be reformed. The military service credit, currently recognized only up to 6 months, will be expanded to cover the full 18 months, and childbirth credit will be applied starting from the first child. Moreover, insurance premium support measures to alleviate the burden on low-income regional subscribers have been prepared.

The government has also focused on establishing a multi-layered pension system in this reform plan, including mandatory introduction of retirement pensions and measures to activate private pensions. This aims to enable retirement preparation not only through public pensions but also through retirement and private pensions. Institutional improvements to increase the profitability of retirement pensions and measures to promote competition among financial institutions have also been proposed.

This reform plan is the government’s draft and will be finalized after negotiations between ruling and opposition parties in the National Assembly. Since the two goals of pension financial stability and income security are in conflict, attention is focused on how discussions in the National Assembly will proceed. It will be an important task for the ruling and opposition parties to reflect public interest and reach a reasonable conclusion.

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