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Citizens Decided “Pay More and Receive More”: Can NPS Last?
  • By Kim Min-seong, reporter
  • 승인 2024.06.03 00:10
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▲ The two reform proposals presented by the Special Committee on Pension Reform

In March 2023, the Ministry of Health and Welfare announced the “5th National Comprehensive Pension Plan,” predicting that the National Pension Service (NPS) will start running a deficit in 2041, with the fund expected to be depleted by 2055. These results are respectively one and two years earlier than the predictions made in the 4th Financial Projection in 2018. Currently, there has been a growing call to reform the current contribution rate, which has been frozen since 1998. The National Assembly Special Committee on Pension Reform decided two final plans from various proposals and let the citizens' representative group make the decision. Plan 1 is “Pay More and Receive More,” which includes a 13% contribution rate and a 50% income replacement rate. Plan 2 is “Pay More and Receive the Same,” which includes a 13% contribution rate and a 40% income replacement rate. 56% of the citizens' representative group, consisting of 500 people from various age groups, supported Plan 1. They emphasized that the poverty rate of senior citizens in South Korea is 40%, the highest among OECD countries, and that the National Pension System has failed to achieve its basic purpose of providing sustainable income to retirees.

The National Pension System (NPS), which has been in full operation since January 1988, is one of Korea's social insurance programs. One of the main features of the NPS is its function of income redistribution between generations. It operates in such a way that the younger and future generations support the elderly population. To alleviate the burden on initial elderly participants, the contribution rates for younger generations are gradually increasing. Furthermore, it employs a partially funded structure, meaning that if the fund is depleted, the pensions are covered by the contributions from the working generation.

In reality, based on the results of the ‘1st National Pension Comprehensive Plan’ conducted in 2003, the deficit point was predicted to be in 2036. Consequently, in 2007, the parliament amended the National Pension Act to decrease the income replacement rates of NPS from 60% to 40%. Thanks to these efforts, the sustainability period of the NPS has been extended by 13 years. The issue lies in the worsening fiscal soundness of the NPS due to low birth rates and an aging population. For example, concerns have been raised about the “baby boomer” generation, which is the largest generation ever born in South Korea. The Ministry of Economy and Finance submitted related data to the parliament in 2023. According to the data, the pension expenses of the NPS are expected to increase approximately four times higher from 36 trillion 2,287 billion KRW in 2023 to 53 trillion 3,413 billion KRW in 2027. As a result of these circumstances, doubts about the sustainability of the NPS are growing among the public.

At the same time, the plan chosen by the citizens’ representatives’ group is causing controversy. The “Association for Pension Research,” a private research center composed of pension experts, stated in a statement on the 2nd of last month that “It will cause a tremendous burden on future generations, and the system itself will not be sustainable.” According to the National Assembly Budget Office, the adoption of the “Pay More and Receive More” plan will increase the current deficit by 702 trillion KRW over the next 70 years compared to the current policy. This stands in stark contrast to the “Pay More and Receive the Same” plan, which is expected to decrease the deficit by 1,970 trillion KRW over the same period. Congressman Ahn Cheol-soo expressed his doubts on Facebook about whether the two plans proposed by the Special Committee on Pension Reform can be considered genuine reforms.

The new reform proposal awaiting approval by the 21st National Assembly has been stalled due to differences in opinion between the ruling and opposition parties regarding the income replacement rate. With the start of the 22nd National Assembly session on May 30th, the authority will transition to the new session. Moreover, the point of pension depletion was privately re- calculated to reflect the phenomenon of ultra- low fertility rates, increasingly focusing the attention of the public on the sustainability of the NPS. To ensure the stability of the National Pension System and avoid burdening future generations, swift and effective reform measures need to be devised.

By Kim Min-seong, reporter  20221240@gs.cwnu.ac.kr

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