[K-Women Talk] Urgent Old-Age Measures for Vulnerable Workers After the National Pension Agreement

Low Adoption of Retirement Pensions in Small Businesses
High Risk of Unpaid Wages in Case of Company Bankruptcy
Mandatory Enrollment and Government Support Needed

Recently, news came that the ruling and opposition parties have, for the first time in a while, agreed on a fundamental reform of the National Pension System. Given the extreme political conflicts, the word 'agreement' felt both unfamiliar and welcome. It would be good if the anxiety of the younger generation about the future and old age could be somewhat alleviated, but the immediate concern about paying premiums now and whether they will actually receive proper benefits 30 to 40 years later does not seem likely to diminish significantly. It is said that the income replacement rate of the National Pension has been agreed upon at 43%, but many still think this is insufficient for old-age security.

Also, since the pension payment age for those born after 1969 is 65, and the current statutory retirement age is 60, with many retiring from their main jobs even earlier, there is concern about the income cliff before pension payments begin. The insufficient benefit level of the National Pension and the gap with the retirement age can be addressed by the retirement pension system.

The retirement pension system was introduced in 2005 with the enactment of the Employee Retirement Benefit Security Act. It converted the statutory severance pay system, which required companies to pay one month’s average wage per year of service to employees who worked more than one year, into a retirement pension system through labor-management agreement. Currently, both the severance pay system and the retirement pension system coexist.

However, the severance pay system does not mandate external funding, so if a company goes bankrupt or the employer loses the ability to pay, there is a high risk of delayed payment. As of 2024, the total unpaid wages amount to 2.0448 trillion KRW, with severance pay accounting for 40% of this. This is a problem that could be prevented if the retirement pension system, which requires annual contributions to external financial institutions, were implemented.

Meanwhile, 87.4% of unpaid wages occur in small and medium-sized enterprises (SMEs) with fewer than 100 employees, indicating that the smaller the company, the higher the risk of delayed payment. However, when looking at the adoption rate of the retirement pension system, SMEs actually have a low adoption rate. Currently, large corporations and public institutions have very high adoption rates. For companies with more than 300 employees, the adoption rate reaches 91.7%. In contrast, companies with 10 to 29 employees have a 56.8% adoption rate, and those with fewer than 5 employees only 10.4%. This is a serious problem where the risk of delayed payment is high, but the adoption rate of the retirement pension system is low. To resolve this, mandatory implementation of the retirement pension system is necessary.

In advanced countries such as Australia and the United States, private pension systems like the retirement pension system are highly developed. The ratio of private pensions to GDP in the US, Australia, and the UK is between 130% and 170%, whereas in Korea it is only 31.7%, showing a significant gap. By joining the retirement pension system, about 8.3% more of the annual salary is accumulated because one month’s wage is saved for every 12 months of employment. This supplements the National Pension’s payment level and can also serve as a bridge pension to address the income cliff.

Additionally, since it is a pure accumulation system rather than a pay-as-you-go system, it has the advantage of faithfully fulfilling the role of pensions despite demographic changes such as low birth rates and aging population. Considering these positive functions, it is necessary to actively promote the introduction of retirement pensions for vulnerable workers in SMEs. Given the burden on small business owners, it is also necessary for the government to consider providing some level of support.

Although there will be immediate difficulties, to ensure the sustainability of our society, we must pool everyone’s wisdom to devise measures. This is also the time to consider systematic infrastructure to secure old-age income for platform workers, such as the increasing number of delivery workers, and freelancers. If young workers prepare for old age by steadily saving even small amounts during their working years, it will have a significant effect over time. It is time to establish systems to enable this.

Kim Kyung-sun, Chairperson of the Korea Retirement Pension Development Institute ·Former Vice Minister of Gender Equality and Family