Pension Reform? It is Right to Cut Away the Rotten Flesh

It appears that discussions on pension reform have once again resumed in the National Assembly. According to media reports, the ruling and opposition parties are clashing over how to proceed with so-called parametric reform—that is, adjustments to the contribution rate and the income replacement rate. A total of nine parametric reform bills have been introduced by both parties, and all of them include raising the contribution rate—the amount paid in—from the current 9 percent to 13 percent. On this point, therefore, there is effectively no disagreement between the parties.

Differences do exist, however, over the income replacement rate. Disputes have arisen over whether this issue should be handled by a special committee together with other related matters, or whether it can be resolved within the National Assembly’s Health and Welfare Committee. Although the parties appear to be bickering, the actual gap between them is hardly significant. The debate boils down to whether the current replacement rate of 40 percent should be raised to 42 percent or to 44 percent (or possibly 45 percent).

No matter how this ends, reforms of this nature would hardly deserve to be called “reform.” Whether the replacement rate is raised from 40 percent to 42 percent or to 44 percent does little to change the reality that the pension remains little more than “pocket-money pension.” Moreover, increasing the contribution rate from 9 percent to 13 percent while simultaneously raising the replacement rate from 40 percent to 42 or 44 percent does nothing to resolve the problem of fund depletion. It merely postpones the inevitable by a small margin.

As many pension experts have pointed out, Korea’s pension system was flawed from the very first step. It was designed from the outset on the premise of “paying a little and receiving a lot,” making it inherently unsustainable in the long run. This structural flaw has been compounded by demographic changes driven by low fertility and rapid population aging, accelerating the depletion of the pension fund. Ultimately, to prevent fund exhaustion and maintain the system, one must raise the contribution rate, lower the income replacement rate, or increase the retirement age at which benefits begin. Every one of these options is politically toxic—each costs votes. This is why politicians, whose livelihoods depend on votes, are inevitably reluctant to pursue genuine pension reform. When the problem becomes too severe to ignore, reform efforts are undertaken, but as noted earlier, they amount only to stopgap measures rather than fundamental reform. The wound continues to fester, with the explosion merely delayed a little further each time. This is what might be called a “pension time bomb pass-the-parcel.”

One factor that contributes to this avoidance of fundamental reform in favor of temporary fixes is the so-called logic of “pension sustainability.” In connection with the current debate in the National Assembly, one media outlet concluded that “the key criterion for reform is the permanent continuation of the National Pension.” If the primary task regarding the National Pension is indeed its “permanent continuation,” then the solution is not difficult to find. It simply becomes a matter of sustaining it indefinitely, regardless of the social cost. For example, one could drastically raise contribution rates or plug the gap with tax revenue—regardless of the consequences—and the pension system would, in form, continue to exist “permanently.” But this perspective is deeply flawed. First, it prioritizes the survival of the system itself while forgetting the very purpose for which the pension system was introduced. Second, it reflects the illusion that we live in a world without scarcity, despite the fact that resource scarcity governs reality. Framing the debate around this notion of “pension sustainability” does not even merit serious discussion.

As most people already understand, as long as the system remains structured around “paying less and receiving more,” all pension reform efforts amount to nothing more than pouring water into a bottomless pit. A few years from now, the pension reform debate will inevitably resurface. What is needed is fundamental treatment, not temporary patchwork.

Broadly speaking, there are two possible paths for reform. One is that, if a pension system is to be maintained at all, it must shift away from the current model of “paying less and receiving more” and move toward a system in which people “receive what they have paid in.” Only then can the chronic problem of fund depletion be eliminated. The second option is to abolish the pension system altogether and integrate old-age income support into the Basic Livelihood Security system. After all, the average monthly pension benefit under the National Pension is only about 600,000 won, whereas benefits under the Basic Livelihood Security program reportedly exceed 700,000 won for a single-person household. Such a change would only improve old-age income security, not undermine it. Moreover, there are countries that have successfully implemented reforms in this direction.

The current pension structure is already rotten flesh—rotten from the moment of conception. Rotten flesh should be cut away. If it is not, it will infect the healthy flesh around it. Rotten flesh must be excised so that new flesh can grow. That is what reform truly means.

Kwon Hyuk-cheol
Director, Free Market Research Institute

Korean version: https://www.cfe.org/20250213_27320