Need to Rethink the National Pension System Itself

The government has unveiled a reform plan for the National Pension. Its main contents can largely be summarized in three points: raising the contribution rate with different increases by generation, adjusting the income replacement rate, and improving the fund’s rate of return. The National Pension contribution rate will be raised gradually from the current 9% to 13%, with the pace of increase applied differently depending on age; the income replacement rate will be adjusted upward from 40% to 42%; and finally, the long-term return on the pension fund will be raised from the current 4.5% to 5.5% or higher, with a greater share of overseas investment and the like to achieve this. The plan also includes putting the guarantee of National Pension payments explicitly into law. If this reform plan is implemented, the depletion date of the pension fund is said to be extended somewhat beyond the current estimate of 2056.

No matter who carries out National Pension reform or how it is done, it is bound to cost political support. The root cause is that when the system was first introduced, it was designed on the basis of “pay a little and receive a lot,” making it unsustainable in the long run. As a result, in order to prevent the pension fund from running out and to keep the system going, there is no choice but to raise the contribution rate, lower the income replacement rate, raise the pension eligibility age—or use some combination of all three. Raising the contribution rate provokes complaints from those who pay; lowering the income replacement rate provokes complaints from those who receive. That is why successive governments have had little choice but to remain silent or passive on pension reform.

Because pension reform is politically costly, politicians approach it only reluctantly, and even when they do pursue reform, it ends up as little more than a stopgap measure to extinguish the most immediate fire. Reforms under previous administrations merely postponed the depletion date of the pension fund by 10 or 20 years. This reform proposal is not much different. The problem of pension fund depletion has still not been resolved; it has merely been pushed back somewhat. It is a kind of “passing the bomb.” And that is only if highly optimistic projections—such as a higher return on fund management—actually materialize. Concerns have already been raised that increasing the share of overseas and alternative investments will also increase investment risk.

Most people say that the depletion of the National Pension fund is largely due to the effects of low birth rates and population aging, but that obscures the essence of the problem. Of course, it cannot be denied that low birth rates and population aging accelerate the depletion of the National Pension fund. However, behind the fund depletion problem lies another fundamental cause that politicians created and structurally entrenched: the pension eligibility age.

When Bismarck, known as Germany’s Iron Chancellor, introduced old-age pensions in the late 19th century, he set the pension eligibility age at 70. This age was lowered to 65 in 1916. That is why 65 is sometimes called the so-called “Bismarck age.” In Korea as well, the pension eligibility age was 60 until 2012, and has since been raised gradually, with plans to increase it in stages to 65 by 2033.

Interestingly, no one talks about the fact that when Bismarck introduced the pension system in the late 19th century, Germans’ average life expectancy was 49. As a result, only a very small number of people actually lived to 70 or even 65 and were able to receive pensions. Likewise, when the United States enacted the Social Security Act in 1935 and began paying pensions, the pension eligibility age was 65, while average life expectancy was 63.

In most advanced countries today, average life expectancy is around 80. In Korea, people live even longer. Current figures show that the average life expectancy of Koreans exceeds 86 for men and 90 for women. When life expectancy was 49, the pension eligibility age was 70 or 65; now that life expectancy has reached 80 or 90, the pension eligibility age is 65 or even lower. Judging by simple proportion in comparison with the age set when Germany first introduced the system, the pension eligibility age should be over 100. Even compared with when it was first introduced in the United States, one would have to be over 80 before reaching pension age. In other words, if pensions are to be sustainable, the pension eligibility age must be raised sharply. But who will bell the cat?

This imbalance naturally cannot help but cause serious difficulties for pension finances. Under these circumstances, in countries with a long history of pensions, most pension systems survive on government tax revenue. If we continue on this path, we too will before long end up financing it with the people’s taxes. Isn’t that ultimately what it means to say, “We will explicitly guarantee National Pension payments by law”? Even financing it through taxes will soon hit its limit. Given the population structure, the tax burden will continue to rise until it reaches a level the younger generation can no longer bear. In countries more advanced in pension systems, intergenerational conflict has already intensified considerably. We are only at the beginning of that stage.

It is only a matter of time before we must fundamentally reconsider the National Pension system itself. The current average pension benefit is about 600,000 won, essentially at the level of a “pocket-money pension.” Meanwhile, the basic old-age pension, which is received without any contribution to the pension system, exceeds 300,000 won. In addition, under the Basic Livelihood Security Program, which is intended to guarantee a basic standard of living for all citizens, the current payment for a single-person household exceeds 700,000 won at maximum. One option worth considering is to abolish the current National Pension system altogether or make participation optional, while strengthening the basic old-age pension or the Basic Livelihood Security Program so that they serve as the basic old-age income security system.

Hyukchul Kwon, Director of the Free Market Institute

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Original title: 국민연금 제도 자체에 대한 고민 필요하다

Author: Hyeok-cheol Kwon

Date: 2024-09-24

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=2&idx=26880