The pension system is a significant and much discussed problem in many countries. Especially, Korea has a deep concern about the depletion of funds. On March 31st, the National Pension Fund Projection Committee announced the results of evaluating the National Pension Fund’s finances. According to the announcement, the fund’s starting point of decrease has been brought forward by one year, and the point of fund depletion has been brought forward by two years, from 2057 to 2055. Upon the announcement of the earlier depletion of the fund, media outlets rushed to release articles expressing concerns about the sustainability of the National Pension system. Additionally, those in their 20s and early 30s are expressing doubts about the system’s sustainability, as the point of fund depletion is earlier than their retirement age. In light of this, the Dongguk Post intends to examine the current operation methods of the National Pension system, along with the background of concerns about depletion, and explore what direction it should take for future change.
The national pension is a system that guarantees security in old age
The National Pension is a social security system implemented by the government to guarantee post-retirement income. In South Korea, it is a public pension system that began in 1988. National Pension is mandatory for all citizens because some people may have a difficulty preparing for retirement on their own due to economic problems. Individuals between the ages of 18 and 60 who have income are required to contribute, and when they reach a certain age determined by their year of birth, they can receive benefits. The National Pension is significant in that it ensures a basic standard of living for individuals in their old age. It is also the welfare system with the most significant effect on income redistribution. However, from a long-term perspective, the depletion of the pension fund is an apparent fact, and the current generation’s distrust based on this could lead to intergenerational conflict and create difficulties in the system’s operation.
Aging and low birth rates threaten pension funds
Fund depletion means that the amount of money paid to beneficiaries from the pension fund exceeds the total revenue. The increase in the elderly population means an increase in the number of beneficiaries. However, it also implies a decrease in the population paying insurance premiums. This can be seen as a situation where expenses increase while income decreases. Additionally, the National Pension system is designed under the assumption that a portion of the benefits will be covered by the premiums paid by current members, while the remainder will be shouldered by future generations. Therefore, given the serious issue of low birth rates, fund depletion seems inevitable. Considering the current situation, the leading causes of fund depletion are expected to be the increase in the elderly population and the low birth rate issue. According to government estimates, the proportion of elderly pension beneficiaries, which was 19.6% in 2020, is expected to rise to 116.0% by 2060. Additionally, the number of elderly pension beneficiaries is expected to reach its highest level, from 5.27 million this year to 15.69 million in 2060. Naturally, pension benefit costs will increase sharply. As the elderly population and pension payments are expected to increase significantly, there is a need to actively address the decrease in the fund balance. In addition, the decrease in National Pension subscribers should also be mentioned. After reaching its peak in 2021, the number of subscribers has started to decline. According to preliminary predictions, the number of subscribers, which is 21.99 million this year, is expected to decrease to 8.61 million by 2093, which indicates a decrease in the birth rate. The issue related to low birth rates can be understood by referring to the following figures. The Fiscal Management Committee estimated that the total fertility rate would increase from 0.73 in 2023 to 0.96 in 2030, suggesting that the birth rate would recover. However, this is an optimistic expectation, as it greatly differs from the previous 4th Fiscal Management Estimate, which projected a total fertility rate of 1.27 in 2023, indicating a significant gap from reality. As the total fertility rate is closely related to the future number of pension subscribers, the current rate of 0.73 suggests there will be a difficulty in operating the pension system. The problem of pension fund depletion leads to financial instability and social distrust, making it difficult to guarantee individuals an adequate standard of living, and particularly deteriorating the problem of elderly poverty. Given the nature of pension systems where immediate profits cannot be guaranteed, financial instability weakens the motivation for actively contributing to the reserve fund. This weakening of motivation threatens social ties and poses difficulties for the system’s sustainability. The issue of elderly poverty is also critical. As the proportion of older people increases in South Korea, elderly poverty will soon come to mean national poverty. Therefore, it is necessary to address the problem of elderly poverty, which is closely related to social maintenance, based on the pension system.
Pension reform needs the right method and timing
Pension reform must be achieved. The need for discussion is urgent because delaying reform will increase the burden on future generations. Key considerations in national pension reform include the required insurance rate, financial mechanisms, and social consensus. Experts believe that an increase in the required insurance rate is essential. Previous pension changes have been implemented by reducing income replacement rates or delaying pension payments, but an effective change requires an increase in the insurance rate. The financial mechanism should be changed from an accumulative system to a pension benefit imposition system when the pension fund is depleted. The imposition system involves collecting taxes or insurance premiums from the young generation each year to support the elderly generation. However, there is a limit to the insurance rate increase, which is expected to be as high as 30% of income when the fund is depleted. The depletion point of the pension fund may be affected by variables such as economic growth rates and may occur sooner or later, so it is essential to proceed with reform at an appropriate pace through social consensus, rather than focusing on time. We must present the current financial situation to the public and establish principles and directions to ensure sustainability, intergenerational equity, and fairness for young generations. Solutions should be found through social dialogue.
It is not easy to run a system that requires as much intergenerational cooperation as the current National Pension system. This also means that there are various perspectives among the persons concerned that need to be considered for any reform efforts. Reforming pension is like examining society, as it is closely related to Korea’s population structure. Discussing pension reform can also expand interests in aging and low birth rates. Since this is a problem with various issues involved, it requires continuous dialogue and attention to find a solution. The Dongguk Post hopes we have an opportunity to think about pension reform as students and future office workers.