"Mom, Now We Have to Pay 220,000 Won Monthly as Regional Subscribers"... National Pension Take-Home Amount Drops Sharply

Actual Pension Income Significantly Reduced by Health Insurance Premiums and Taxes
Some Recipients Opt for Early Pension Despite Reduced Amounts

There are growing concerns that elderly individuals receiving the National Pension may see their actual pension income shrink significantly more than expected due to the double burden of health insurance premiums and income tax on their pension income. In particular, since the restructuring of the health insurance premium system in September 2022, there has been an increase in cases where pension income causes individuals to lose their dependent status under a family member’s employer-sponsored health insurance and be reclassified as regional subscribers, forcing them to pay hundreds of thousands of won in new monthly health insurance premiums. This has raised red flags for retirement planning.

On June 17, Yonhap News cited a report from the National Pension Research Institute titled "The Impact of Health Insurance and Pension Income Taxation on the National Pension," reporting that "there is a possibility that a large number of pension recipients who were previously registered as dependents under their children’s employer-sponsored health insurance will be converted to regional subscribers." This is because the second phase of the health insurance premium system reform tightened the income threshold for maintaining dependent status from 34 million won per year to 20 million won per year. According to the report, this change is expected to convert 7.2% of dependent households with members aged 60 or older?about 249,000 households?into regional subscribers. The additional health insurance premiums these households will have to pay amount to an average of 2.64 million won per year, or about 220,000 won per month.

The problem does not end there. Even when receiving the same amount of pension, the burden of health insurance premiums varies depending on the type of pension, creating what is called an "equity trap." Under the current system, health insurance premiums are levied on public pension income such as the National Pension, but not on basic pensions or private pensions such as retirement or personal pensions. For example, a person (A) who receives a monthly pension income of 2 million won entirely from the National Pension has the entire amount counted as assessable income for health insurance premiums (with 50% of the income reflected). In contrast, another person (B) who receives 1 million won from the National Pension and 1 million won from a retirement pension pays health insurance premiums only on the 1 million won from the National Pension. Although their total incomes are the same, those relying solely on the National Pension end up paying more in health insurance premiums, which is an unreasonable structure.

The tax issue is similar. The basic pension is fully tax-exempt and thus carries no tax burden, whereas the National Pension old-age pension is taxable. As a result, recipients who receive both the National Pension and the basic pension have a higher actual disposable income than those who receive only the National Pension. This burden is also influencing the behavior of those approaching pension eligibility. The report suggests that, in order to avoid the burden of health insurance premiums, future recipients with relatively higher pension entitlements may choose the "early old-age pension," accepting a reduced amount instead of the full old-age pension.

The early old-age pension allows individuals to begin receiving their pension one to five years before the statutory pension age. For each year the pension is received early, the amount is reduced by 6% per year (0.5% per month), resulting in a maximum reduction of 30% if received five years early. In other words, receiving the pension five years early results in 70% of the original amount, four years early results in 76%, three years early results in 82%, two years early results in 88%, and one year early results in 94%. Because receiving the National Pension early reduces the total amount received, it is often referred to as a "loss pension."

Therefore, experts emphasize that when discussing the real security provided by the National Pension, it is important to consider not just the nominal pension amount, but also the "net pension income" after deducting health insurance premiums and taxes. The report makes several policy recommendations: deducting the amount of the basic pension from National Pension income when calculating health insurance premiums; including reverse mortgages in the deduction for housing finance debt; and providing detailed information about such taxes and insurance premiums to future recipients.