By Choi Kyong-ae
The government is moving to provide bigger tax benefits to individuals who increase their private pensions as it has limited fiscal room to support their lives after retirement.
Within this year, the Financial Services Commission (FSC) will propose a bill to revise the upper limit of private pensions allowed for tax income deductions to 7 million won ($5,875) a year from the current 4 million won, said FSC Chairman Yim Jong-yong in a recent interview with a local newswire, according to an FSC spokesman.
Under the current law, 7 million won a year worth in state pension subscriptions and 4 million won worth in private pensions are eligible for tax deductions.
Experts say the government is going in the right direction as Korea is becoming one of the most aged societies and its elderly poverty problem is the worst of countries in the Organization for Economic Cooperation and Development (OECD).
But they also warned the tax benefits will to weigh on the government’s financial health next year. In recent years, Korea has increased its spending without raising taxes such as corporate tax and has suffered from a lack of tax revenue.
A 3 percent increase in the government’s proposed budget of 386.7 trillion won for next year will have the ratio of government debt to gross domestic product exceed 40 percent for the first time, according to the finance ministry Tuesday.
“The government is not capable of offering a safety net to most people age 65 or older with its fiscal means. The national pension funds are expected to run out by 2060 if there are no increases in insurance premiums. Public fund subscribers want to receive higher returns, but do not want to pay higher premiums,” former National Pension Service Chairman Jun Kwang-woo said Wednesday.
“So the government now encourages people to inject more money in private pension products. Of course, the government’s approach won’t resolve all the elderly poverty problems because many salaried workers cannot afford to have private pensions.”
Asia’s fourth-biggest economy is expected to be an aged society by 2026, with 14 percent of its population age 65 or older.
To keep the public funds available after 2060, Jun said there should be a gradual increase in insurance premiums. Korea ranks the lowest among 34 OECD member countries in terms of insurance premiums for national pension plans.
Meanwhile, FSC Chairman Yim said the government will sell non-financial affiliates of the Korea Development Bank (KDB) in order for the state-owned bank to focus on supporting small and medium-sized companies which have technologies and growth potential.
“The KDB has been in charge of restructuring non-performing companies but an outside company will take over the job,” Yim said.
As for household debt, the FSC said it will closely monitor banks if they step up their marketing to offer mortgages and other loans on lower rates by December, further pushing up household debt. From next year, stricter rules are applied when individuals take out loans from financial institutions.
Korea’s household debt jumped 4.5 percent to 1.13 quadrillion won at the end of June from 1.09 quadrillion won at the end of 2014, according to the Bank of Korea.