[칼럼] Korea Story 28 - Society and Welfare 4 by Atty Jeong-kee Kim

(NewsKorea=Seoul) Digital News Team = Korea Story 28 - <Society and Welfare 4  by Atty Jeong-kee Kim>

● Public pension reform must be hastened.

Pension refers to a system in which an individual provides a certain amount of money during his or her working period and receives a certain amount of salary every month according to regulations after retirement. It is a system that everyone needs for a stable life in old age. There are various types, and depending on the entity that operates it, there are public pensions, corporate pensions, and personal pensions. There is also pension insurance.

However, my focus here is on public pensions. Public pensions refer to pensions directly managed or operated by the state or local governments. In Korea, public pensions include the Government Employees Pension, the Military Pension, the Private School Teachers’ Pension (which covers private school teachers and administrative staff), and the National Pension, which applies to the general public.

The National Pension, which has been in place since 1988, has a relatively short history and currently benefits less than half of the elderly population. Moreover, the average monthly payment of 350,000 KRW does not provide significant support for a stable retirement. This is far from the situation in Western developed countries, where 70-80% of retirees enjoy a stable old age through pensions.

A key characteristic of Korea's National Pension is its income redistribution function, which redistributes income from higher-income groups to lower-income groups within the same generation. Since the average income of National Pension subscribers is higher than that of low-income subscribers, low-income earners receive more in pensions than they contributed, while high-income earners receive relatively less in benefits. Although this might be a source of dissatisfaction for the wealthy, it does contribute to the overall stability of society. However, our National Pension system, which operates on a principle of low contributions and high benefits, faces a fundamental problem: eventually, the National Pension Service’s fund will be depleted. According to projections, the fund, which is expected to peak at 2,561 trillion KRW in 2043, will start to decrease and could be completely depleted by 2060. This is a significant concern and will place a tremendous burden on future generations, especially today’s young people.

The National Pension Service is engaging in various subsidiary projects, such as investing in stocks, to manage the fund stably and increase returns. However, if these ventures do not yield the expected results or fail, the depletion of the fund could occur even sooner. Additionally, as we enter an era of increased longevity, the life expectancy of pension recipients has been rising, leading to a higher number of elderly individuals receiving lifetime pension payments. This, in turn, accelerates the depletion of the fund.

On the other hand, the number of people contributing to the National Pension is steadily declining, and the outlook is becoming increasingly pessimistic. The primary reason for this is the low birthrate. South Korea’s birth rate is 0.78, the lowest in the world. The number of voluntary single-person households is increasing, and about 60% of women in their 20s say they do not intend to have children, even if they get married. Despite various policies to encourage childbirth and the provision of welfare benefits for having children, these measures have not been effective. Fundamental solutions are needed, though they are difficult to achieve. The reasons behind the increase in single-person households and the growing number of unmarried women who do not want to have children are significant, and their numbers are increasing daily. Unless there are signs of improvement in the real difficulties faced by the younger generation, such as social instability, uncertainty about the future, relationships, marriage, childbirth, buying a home, child-rearing, and private education costs, the low birthrate issue will remain unresolved.

Another problem is the increasing number of early pension recipients who start receiving their pensions before reaching the appropriate age due to economic instability. Continuous economic crises have led to a rise in early retirees, and as the economy deteriorates, more people are opting to receive their pensions early, even at a loss. This trend could have a significant impact on the management of the National Pension fund.

Recently, the Ministry of Health and Welfare announced that, according to the financial projections for the National Pension, which are conducted every five years, the fund depletion date has moved up by two years to 2055, compared to five years ago. The primary reasons for this are the low birthrate and the aging population mentioned earlier.

Although various issues with the National Pension, particularly the serious problem of fund depletion, have been pointed out for a long time, no specific reform measures have been proposed. However, recently, the government and the National Assembly have begun to urgently address the issue, albeit belatedly.

As concerns grow that the National Pension fund will be completely depleted in about 30 years, public distrust in the National Pension is rising. There are even unfounded rumors that the insurance premium, currently 9% of wages, will have to increase to 30% to prevent fund depletion, causing widespread fear and prompting urgent action.

The Yoon Suk-yeol administration has already identified National Pension reform as one of the three major reform tasks. The National Pension Financial Calculation Committee has proposed a reform plan, with the main points being to raise insurance premiums and delay the age at which people start receiving their pensions. While these may seem like obvious and inevitable solutions, they may indeed be the only options available. However, the critical questions are how much the premiums will be raised and how much the pension eligibility age will be delayed.

The National Assembly also has a Special Committee on National Pension Reform, and fund depletion is their most pressing issue. A recent research report by the Private Advisory Committee of the Pension Reform Special Committee included a proposal by Professor Kim Woo-chang of KAIST, suggesting that if the National Pension insurance premium is raised from the current 9% to 12% by 2030, if the government contributes 1% of GDP annually to the pension fund, and if the fund’s return on investment is increased by 1.5% (from 4.5% to 6%), the fund could be maintained at a level of about 2,000 trillion KRW and not be depleted for over 100 years.

The average pension insurance premium in OECD countries is 18.2%, which makes Korea’s 9% quite low. The public agrees that the National Pension insurance premium needs to be raised. As mentioned repeatedly, the most crucial issues are how much the premium will be raised and how much the pension eligibility age will be delayed. Politicians, especially with elections approaching, should avoid delaying pension reform or setting unrealistically low premium increases as part of populist policies. At the same time, public pensions like the Civil Servant Pension and Military Pension are also running deficits, and the state has been covering these shortfalls.

The Civil Servant Pension has been running a deficit since 1993, and the Military Pension is also in deficit. According to the National Fiscal Management Plan submitted by the Ministry of Economy and Finance to the National Assembly, the government’s spending on these two public pensions in 2024 is expected to increase by 1.2732 trillion KRW (14%) to 10.0240 trillion KRW from 8.7508 trillion KRW this year. Specifically, the expenditure on the Civil Servant Pension will rise by 16.9% from 5.6491 trillion KRW to 6.6071 trillion KRW, and the Military Pension expenditure will increase by 10% from 3.1017 trillion KRW to 3.4169 trillion KRW. Meanwhile, the state support for the National Pension will only increase by 5.7% from 105 billion KRW this year to 111 billion KRW, and the Private School Teachers’ Pension will decrease by 7.2% from 1.0899 trillion KRW to 1.0111 trillion KRW.

It is concerning to think about how long such patchwork solutions will continue. There is an urgent need for comprehensive and innovative reform measures.

☆ Author:  Atty Jeong-kee Kim ☆

● Education
- Bachelor of Arts in Political Science, Summa Cum Laude, State University of New York at Stony Brook
-  Doctor of Jurisprudence, Marquette University Law School
- Senior Executive Program, John F. Kennedy School of Government, Harvard University
- Research Scholar in North Korean Studies, Peking University

● Experience
- Consul General of the Republic of Korea in Shanghai
- Commissioner General for the Korean Pavilion at the 2010 Shanghai Expo
- CEO, Asia-Pacific Local Government Network for Economic and Social Development (CityNet)
- Secretary General, World Smart Sustainable Cities Organization(WeGO)
- Law Clerk, Milwaukee Circuit Court, USA
- Senior Attorney-at-Law, Dr & Aju LLC
- Distinguished Visiting Professor, World Economy Research Institute, Nanjing University
- Research Professor, Institute of Oriental Studies, Peking University
- Distinguished Professor, Graduate School of Political Science, Kookmin University
- Chair Professor, Graduate School of Business, Dongguk University
- First President of Soongsil Cyber University

● Publications
- Georo English Studies Series for College Students [10 volumes] (Georo Publishing)
- I Challenge the Possibility of One Percent (Chosun Ilbo)
- The Art of Negotiation (Cheongnyonneongsin Publishing)
- Korea and the World (Chekmidum Publishing)