National pension requires reform to prolong fund reserve

By Kim Hyun-bin

The growing elderly population and the decreasing younger generation are raising the question over whether the national pension fund can remain afloat ― to which many experts give pessimistic answers.

The faster-than-expected aging society has pushed the National Pension Service (NPS) to come up with a countermeasure to better prolong the pension reserve, as recent government prediction expects the fund to be exhausted by 2057.

The prediction is three years earlier than the previous government forecast in 2013, which forecasted the fund to be depleted by 2060.

The decline in the funds is inevitably forcing the government to raise premiums to keep the pension running, according to the NPS, which is scheduled to release a pension reform plan this month with a probable premium raise, the first increase in 20 years.

"The current premium is at 9 percent (of incomes), half of which is paid by the employer and the other half by the employee. If the fund keeps on depleting, the premium has to go up to fill the gap. The 9 percent could go up to 40 percent in the future," Kim Won-sup, a professor of social studies at the Korea University, said.

"To prevent the drastic hike in premium, the government is brainstorming to find a way to maintain operation of a fund with a manageable premium," Kim said.

The government is looking into two options _ to increase the premium from the 9 percent to 11 percent starting next year, or increase the premium gradually to 13.5 percent over the next decade.

The first option maintains the pension income replacement rate at the current 45 percent, but raises the premium to 11 percent next year and to 12.3 percent in 2034. After that, the NPS would adjust the premium every five years.

"Financial calculations show if we increase the premium by just 2 percent, we can maintain the pension income replacement rate at 45 percent," Rep. Jung Choun-sook of the Democratic Party of Korea (DPK), said in mid-October. "The increase could also delay the national pension fund depletion by five years to 2062."

The second option aims to lower the replacement rate by 0.5 percentage points annually until it reaches 40 percent in 2028, while gradually increasing the premium to 13.5 percent over the next 10 years.
The eligible age to receive the pension _ set at 65 until 2033 _ would be adjusted to 67 by 2043.

As of May, there was 634 trillion won ($557 billion) in the national pension fund _ equivalent to 36 percent of GDP.

The fund is expected to peak at 1,778 trillion won in 2041, lower than the 2,561 trillion won predicted in 2013. The reduction in the reserves peak is due to several factors, which include sluggish economic growth, wage growth rate and interest rates, according to the NPS.

The number of pension subscribers will peak at 21.8 million next year, but will then gradually decline to 10.1 million by 2088.

The calculations are based on increased life expectancy, predicted to reach 90.8 for men and 93.4 for women by 2088.

"The decline in the birthrate and the increase in the average life span are expected to increase the number of people eligible to receive the pension, in turn drastically reducing the pension reserves," an official at the NPS said.

The Ministry of Health and Welfare has been gathering public opinion and was scheduled to submit a revised proposal for pension reform to the National Assembly by October but it postponed the schedule to this month.

People have been voicing outrage over the NPS' mishandling of the fund and its plan to increase premiums and push back the payment age.

There have been numerous petitions on Cheong Wa Dae's website, calling for the abolishment of the national pension system, as subscribers are increasingly concerned they won't be able to receive their fair share after retirement.

According to the relevant law, if the majority of the public is in favor of the termination and the National Assembly endorses it, the fund could be abolished.

However, many experts say it would be impossible to end the program as the liquidation would cost more than what's needed to maintain the fund.

The country's national pension fund is the world's third-largest in size with 630 trillion won in assets.

In addition, the fund is invested heavily in both local and foreign financial markets. It has 5 percent stakes in 275 Korean companies as of 2016, including Samsung Electronics and Hyundai Motor.

Experts say if the investments are suddenly taken out, it could cause the stock market to crash. As of May, 20.5 percent of the national pension fund is invested in local stocks _ 18 percent in foreign stocks, 46.5 percent in local bonds, 3.8 percent in foreign bonds, 10.6 percent in alternative investments and 0.2 percent in other fields.

Only 0.4 percent of the fund is in immediately cashable assets, according to the NPS Investment Management headquarters.

People who have subscribed to the pension for at least 10 years are eligible to receive a pension starting at age 65. As of May, there are over 4.47 million eligible people.

Under the current law, it is mandatory for the government to pay out pensions for anyone who has subscribed for over 10 years. If the pension is depleted, the government is obligated to pay it from taxes.

The current 634 trillion won in the national pension is hardly enough for the current eligible subscribers. The NPS estimates 1,242 trillion won is needed to reimburse all current subscribers, which is almost double the current fund.

When the NPS was first implemented in 1988, there was only 530 billion won in the fund but that number exceeded 100 trillion won in 2003 and reached 634 trillion won as of this May.

"We need to give enough information so that the public can fully understand the pension system," NPS Chairman Kim Sung-joo said during the National Assembly's government inspection in October. "There needs to be more debates between experts and interest groups. Reforming the pension is a hard task, so it is the National Assembly's job to garner public support and establish a sustainable pension system."

According to Statistics Korea, 62.1 percent of the population is preparing for their retirement through the NPS and other public pension plans, and only 9.8 percent are awaiting private pensions.