Seoul: The National Assembly voted to reform the national pension system Thursday after nearly two decades, paving the way to delay the depletion of the pension fund by nine years.
According to Yonhap News Agency, the parliamentary passage of the reform bill came after the ruling and the main opposition parties reached a last-minute agreement on plans to reform the nation's ailing pension system, marking the biggest overhaul of the pension fund in 18 years. The new scheme increases the pension contribution rate to 13 percent from the current 9 percent, with the nominal income replacement rate raised to 43 percent from 41.5 percent, implementing a "pay more, receive more" model.
The contribution rate will increase by 0.5 percentage point annually over eight years starting next year, while the income replacement rate will be set at 43 percent beginning next year. For instance, a South Korean company worker earning the median monthly wage of 3.09 million won (US$2,117) will pay an additional cumulative 54.13 million won over 40 years compared to the current system, receiving 21.7 million won more in pension payments after retirement, according to data from the National Pension Service (NPS), released by Rep. Kim Sun-min of the minor opposition Rebuilding Korea Party.
When the national pension system was launched in 1988, the contribution rate was set at 3 percent, and the income replacement rate was at 70 percent to attract more subscribers by maximizing benefits. The first revision occurred under former President Kim Dae-jung's government, which increased the contribution rate to 9 percent and lowered the income replacement rate to 60 percent. The second reform happened in 2007 during the Roh Moo-hyun government, which decided to gradually cut the income replacement rate to 40 percent by 2028.
Experts indicate that the new system is expected to delay the depletion date of the pension fund by nine years and the swing to deficit by seven years. Under the current system, the pension fund is expected to incur a deficit in 2041 and completely run out by 2055. However, with the new system, the NPS is likely to swing to red in 2048 and run out of funds in 2064. If the national pension fund successfully increases its return on fund investments to 5.5 percent, as previously announced, from the current target of 4.5 percent, the fund depletion may be further delayed.
South Korea's pension system was originally designed to guarantee a certain amount of income after retirement to address the high poverty rate among elderly people. However, with the nation rapidly aging and its birth rate declining, concerns have grown that the younger generation might not receive pension benefits despite their contributions. To address these concerns, the government has been pushing for adjusting the contribution and income replacement rate to postpone the fund depletion.