Growing Interest in National Pension Reform "Discussion on Actual Income Replacement Rate Must Be Included" [Why&Next]

Discussion Focused on 'Nominal Income Replacement Rate' Based on 40-Year National Pension Contributions
85% of Low-Income Regional Subscribers Do Not Meet the Minimum Contribution Period (10 Years)

Ahead of the ruling and opposition parties and government agreement meeting on the 20th, attention on pension reform is increasing. The focus is solely on how much the ruling and opposition parties will adjust the nominal income replacement rate (the amount received). Concerns are being raised at the grassroots level about pension reform discussions being centered only on the nominal income replacement rate. To ensure the effectiveness of the reform, there is an opinion that discussions aimed at increasing the real income replacement rate, emphasized by the government and civil society, must be included.

Minister of Health and Welfare Cho Kyu-hong is greeting Financial Services Commission Chairman Kim Byung-hwan at the pension reform policy forum hosted by the People Power Party's Pension Reform Special Committee at the National Assembly on the 12th. Photo by Kim Hyun-min kimhyun81@

According to the government on the 19th, Choi Sang-mok, Acting Prime Minister and Minister of Economy and Finance, Woo Won-shik, Speaker of the National Assembly, Kwon Young-se, Emergency Committee Chairman of the People Power Party, and Lee Jae-myung, leader of the Democratic Party, will hold a four-party meeting in the form of a national consultation body on the 20th. The main agenda to be discussed at the table includes parametric reforms adjusting figures within the National Pension such as the contribution rate (amount paid) and the income replacement rate (amount received).

The focus is on whether the ruling and opposition parties can reach an agreement on raising the nominal income replacement rate. The People Power Party argues that to ensure the sustainability of the pension, the current schedule to gradually lower the income replacement rate to 40% by 2028 (41.5% this year) should be maintained. The Democratic Party believes the income replacement rate should be adjusted within the 43-45% range, which was agreed upon in the 21st National Assembly. The government announced a pension reform plan last year proposing to raise the income replacement rate from 40% to 42%. There is no disagreement between the two parties on raising the current 9% contribution rate to 13%.

Discussion Focused on 'Nominal Income Replacement Rate' Based on 40 Years of Contributions... 'Real Income Replacement Rate' Below 25%

Interest in raising the real income replacement rate, emphasized by the government and civil society, is minimal. The nominal income replacement rate calculates the pension amount a person with the average monthly income of all contributors (A value) would receive if they contributed for '40 years.' It means the percentage of the average annual income earned during the contribution period that is received annually as a pension.

Since it assumes contributors who have worked long-term at a workplace and consistently paid pension contributions for 40 years, a gap with the real income replacement rate is inevitable. The real income replacement rate indicates the percentage of the lifetime average income of pension recipients that they actually receive.

The National Pension Research Institute estimates the real income replacement rate to be 24.2% in 2020 and 23.2% in 2030. The average contribution period for new recipients was estimated at 18.6 years in 2020 and 20.4 years in 2030. Even if the nominal income replacement rate targets 40%, the unavoidable gap arises because few contributors actually reach the 40-year contribution period. The real income replacement rate for low-income self-employed or freelancers, who find it difficult to maintain long contribution periods, is inevitably lower.

For this reason, the Ministry of Health and Welfare has emphasized the limitations of discussions centered on the nominal replacement rate. To strengthen the coverage of the National Pension, it is important to increase the 'contribution period' to raise the real income replacement rate. Among regional subscribers who do not receive company contribution support unlike office workers, finding blind spots where paying contributions is difficult and supporting their enrollment are important alternatives.

The Key to Strengthening Coverage is Increasing the 'Contribution Period'... 85% of Low-Income Regional Subscribers Do Not Meet 10 Years

In the pension reform plan announced last September, the Ministry of Health and Welfare proposed measures to support the expansion of the National Pension contribution period to improve the real income replacement rate. This included strengthening the credit system that recognizes periods such as childbirth and military service as part of the contribution period and expanding contribution support for low-income regional subscribers. According to the Ministry, only 15.2% of low-income regional subscribers (annual income below 1 million KRW) meet the minimum contribution period (10 years), and the average contribution period is only 52 months.

Experts also emphasize that discussions to expand the real income replacement rate should not be excluded from the pension reform debate. Oh Geon-ho, Policy Committee Chair of the Welfare State We Make, pointed out, "The current structure of the pension reform debate in Korea is somewhat distorted," adding, "Important issues for the vulnerable, such as improving real income replacement rate coverage, are not being addressed because the discussion is blocked by the nominal replacement rate figures."

He said, "Discussions on expanding pension credits and increasing financial input to strengthen contribution support for low-income regional subscribers, which civil society and the government have unanimously emphasized, must be addressed together in this agreement." A government official said, "Of course, there is not much disagreement between the ruling and opposition parties on strengthening credits or filling blind spots," but added, "This time, since the content requiring financial input is not being focused on in the discussion, we can only wait and see."