Why delay pension reform?

The country’s National Pension Fund has exceeded 1,000 trillion won, reaching the milestone for the first time since the introduction of the national pension system here 35 years ago. The fund doubled just eight years after it first crossed the 500 trillion won mark in 2015.

The National Pension Fund, which is the world’s third-largest by total assets after Japan's Government Pension Investment Fund (GPIF) and Norway's Government Pension Fund (GPF) now faces significant challenges. While the government is set to submit a blueprint for pension reform to the National Assembly this month, many doubt whether it will come up with concrete reform plans.

Reforming the National Pension has been one of the three major reform tasks of the Yoon Suk Yeol administration, along with labor and education reform. This was especially emphasized because it is an urgent national issue; the fund is projected to be depleted. According to the estimate on National Pension released in March, under the current system, the fund is expected to enter a deficit from 2041 and run out by 2055.

When the National Pension system was introduced here back in 1988, people dreamed of a happy retirement life for senior citizens, where they can enjoy travel and leisure once they reach retirement age after contributing to the fund when they were young.

However, the National Pension had a problem from the beginning as it was designed to offer much bigger benefits compared with contributions. Additionally, demographic and economic circumstances have changed significantly since then. Last year, less than 250,000 babies were born in Korea, with the total fertility rate, or the number of babies born per woman, standing at the world’s lowest of 0.78. The country saw 630,000 births in 1988, the year the National Pension was launched. The birth rate is expected to further decline, and life expectancy in South Korea has increased from 70 years in 1988 to 83.6 years in 2021.

In other words, the number of contributors paying premiums is decreasing, while the pension that must be paid out is increasing significantly. To delay the depletion of the fund, it is necessary to increase insurance premiums, delay the age at which pensions can be received, and improve the fund's return on investment. For instance, by gradually increasing the current 9 percent insurance premium rate to 12-18 percent annually starting in 2025 while raising the starting age of pension payout to 66-68 and raising the fund's return on investment by 0.5 or 1 percentage point, the projected depletion of the pension fund could be extended until 2093.

Despite the known solutions, reforming the National Pension Fund has often been put on the back burner. The insurance premium rate has remained at 9 percent of income for 25 years, which is less than half of the average 18.3 percent of OECD member countries.

During the Kim Dae-jung administration, the income replacement rate was reduced from 70 percent to 60 percent, while it was determined that the starting age should be gradually extended from 60 to 65 by 2033. During Roh Moo-hyun's administration, it was agreed that the income replacement rate should decrease further to 40 percent by 2028.

Subsequent administrations ― those of Lee Myung-bak, Park Geun-hye and Moon Jae-in ― have shunned pension reform. It is estimated that the projected fund depletion date was brought forward by two years due to the lack of reform during the Moon administration.

There is now a growing call for pension reform this time, after delays of 15 years. But achieving visible results appears difficult again given the upcoming general elections. Politicians fear that they will lose votes since pension reform means more sacrifice, less benefit or both.

One hopeful aspect is that President Yoon has stated, "Reform may not be popular, but I will not avoid it." President Yoon, who is different from the typical politicians in many ways, might leave a significant legacy that even those who didn't support him will acknowledge if he continues with the pension reform plan.

Everybody now knows that the National Pension can’t go on like this. Through open discussion including all generations, it might be easier to persuade voters than politicians believe.

The writer is finance editor at The Korea Times.