Remaining Challenges After Pension Reform in 18 Years: A Steep Uphill Battle [Why&Next]

Woo Won-sik, Speaker of the National Assembly, Kwon Seong-dong, Floor Leader of the People Power Party (left), and Park Chan-dae, Floor Leader of the Democratic Party of Korea (right), shake hands after agreeing on the National Pension reform plan in the Speaker's office of the National Assembly on March 20, 2025. Photo by Kim Hyun-min

Although the political sphere has passed a reform plan for the National Pension after 18 years, many challenges remain. The automatic adjustment mechanism, which the ruling and opposition parties have agreed to discuss further, is essential for the sustainability of the pension, but significant differences in opinion make the possibility of consensus uncertain. There are also voices calling for changes in the basic pension, such as drastically reducing the number of beneficiaries. Whether the occupational pensions, which face strong opposition from subscribers, can be revised is also a key issue.

On the 20th, the National Assembly passed a parameter reform plan in the plenary session that raises the National Pension contribution rate to 13% and increases the income replacement rate to 43%. The depletion of pension funds, which would reduce pensions, is postponed by 8 years compared to the current projection, and the cumulative deficit of the National Pension is expected to decrease by 430 trillion won. On the same day, the National Assembly agreed to activate a special committee on pension reform by the end of this year to discuss the remaining pension reform tasks.

Beyond Parameter Reform, Introducing Automatic Adjustment Mechanism Means 'Major Fire Extinguished'

The top priority for discussion between the ruling and opposition parties is the 'automatic adjustment mechanism.' This mechanism adjusts the contribution rate upward or lowers the income replacement rate to stabilize finances depending on the pension situation. It is triggered in situations such as an increase in beneficiaries' life expectancy, a decline in future generations' birth rates or economically active population, or when pension liabilities exceed assets.

Additional agreement on the automatic adjustment mechanism is expected to be difficult. The government and ruling party believe that the National Pension system still causes deficits and that parameter reform alone is insufficient to ensure financial stability. Considering the speed of low birth rates and aging, they argue that the automatic adjustment mechanism is necessary to ensure the pension's sustainability. However, the opposition party is taking a cautious approach. Jin Seong-jun, the policy chief of the Democratic Party of Korea, also expressed caution on the 24th of last month, stating, "Labor and civil society groups with direct interests in the pension have conveyed opposing opinions to the party."

There are also significant differences of opinion outside the political sphere among experts and civic groups. On the 20th, Yoon Seok-myung, honorary research fellow at the Korea Institute for Health and Social Affairs, held a press conference at the National Assembly in Yeongdeungpo-gu, Seoul, stating, "To avoid increasing the debt, which is expected to reach 2,060 trillion won by 2025, the contribution rate must be immediately raised to 21.2%," and pointed out, "Raising the contribution rate to 13% over eight years alone is insufficient to achieve financial stability." He further argued, "Introducing the automatic adjustment mechanism is inevitable to maintain the Korean community."

On the other hand, the Public Pension Strengthening National Action, composed of the two major labor unions and the People's Solidarity for Participatory Democracy, issued a statement on the same day criticizing, "The government and ruling party should strongly block all attempts to automatically reduce the National Pension, which is the people's precious retirement income." Their reasoning is that triggering the automatic adjustment mechanism, which raises contribution rates and lowers income replacement rates for beneficiaries, could seriously undermine the National Pension's function as a retirement income guarantee.

The impact of introducing the automatic adjustment mechanism varies depending on the analysis method and the entity conducting it. The National Pension Research Institute analyzed that if the automatic adjustment mechanism is introduced, the lifetime total salary of an average-income subscriber starting to receive the pension in 2050 would decrease by about 16%, from 120.35 million won to 99.91 million won. The People's Solidarity for Participatory Democracy estimated that adopting the government's proposed method would reduce the pension amount for those born in 1980 by 79.77% and for those born in 1982 by 80.72%. Professor Kim Yeon-myeong of Chung-Ang University's Department of Social Welfare predicted that the pension amount would decrease by nearly 20%. A government official said, "It depends on how the automatic adjustment mechanism is designed," adding, "It is difficult to implement it in a way that drastically reduces pension benefits."

The official added, "Even if the automatic adjustment mechanism is introduced, it will only delay the pension depletion point by about 7 to 8 years," and said, "The automatic adjustment mechanism must be introduced along with the parameter reform to maintain pension stability for the time being." Since the immediate major crisis has been averted through parameter reform and the automatic adjustment mechanism, there is now room to monitor factors such as birth rates and National Pension returns. If the situation worsens 20 to 30 years from now, Korea will have no choice but to undertake further reforms, just as other advanced countries have done multiple times.

Basic Pension: Need to Reduce Beneficiaries

Structural reforms linked to other pension systems such as the basic pension, occupational pensions, private pensions, and retirement pensions are also among the special committee's discussion topics. Regarding the basic pension, the prevailing opinion is that the number of beneficiaries should be reduced to align with the goals of National Pension reform and the practical alleviation of elderly poverty. As the income and asset levels of the elderly improve and elderly poverty declines, there is little disagreement that pension recipients should be selected mainly among impoverished elderly.

The Korea Development Institute (KDI) suggested in February, in its 'Direction for Reforming the Basic Pension Selection Method,' that the criterion of the bottom 70% of income-recognized amounts among all elderly, which considers income and assets, should be changed to reflect the improved economic situation of the elderly. They proposed shifting the standard from 'among the elderly' to 'among the entire population' and gradually reducing the payment standard from 100% to 50% of the median income, transforming the basic pension into a pension provided only to truly impoverished elderly.

In fact, poverty levels have improved among more recent birth cohorts within the elderly population. According to KDI, as of 2021, the poverty rates for those born in the late 1930s (46.3%) and early 1940s (51.3%) are higher compared to those born in the early 1950s (27.8%) and late 1950s (18.7%).

As the income and asset levels of those entering old age in the 1960s and 1970s improve further, elderly poverty rates will decline even more. These cohorts are classified as the 386 generation, with higher asset and income levels, and their National Pension coverage rate is higher than that of those born in the 1950s (61.1%). According to KDI's long-term projections of elderly poverty rates, the rate will decrease to the 30% range in the 2050s and to the low 20% range in the 2070s.

The Most Difficult Challenge: Integration of National Pension and Occupational Pensions

The most challenging task is the integration of the National Pension with other occupational pensions (government employee pension, private school teacher pension, military pension). From a structural perspective, occupational pensions require significant reform. The government employee pension fund has already run out of money and is receiving government subsidies. The first government subsidy was made in 2001 and has steadily increased to 8.605 trillion won last year. It is expected to approach 10 trillion won this year. The military pension fund was depleted in 1977, and government funding has been ongoing for nearly 50 years. The private school teacher pension is projected to run a deficit for the first time in four years and will be completely depleted by 2049.

Nevertheless, strong opposition from subscribers makes it difficult to make changes easily. The government employee pension underwent reform once during the Park Geun-hye administration in 2015. The government gradually raised the contribution rate from 7% to 9%, reduced pension benefits by more than 10%, and delayed the pension eligibility age from 60 to 65. This was achieved despite severe opposition, including a general strike by the government employee union. Moreover, the reform was implemented very slowly, so its effects still need to be observed. Reforming the military pension is even more difficult. The military pension system has different retirement ages by rank and varying working conditions, making it harder to reach agreement on contribution rates and benefit levels. Especially since the military pension beneficiaries are officers and non-commissioned officers, who have recently experienced lowered morale due to the 2 million won monthly salary policy for enlisted soldiers, there could be strong backlash if the military pension is reduced.