Pension Experts From OECD Member Countries Evaluate Korea's Pension Reform <2>

[Asia Today · Yun Suk-myung Column · July 7, 2024]

Yun Suk-myung, Research Fellow Emeritus at the Korea Institute for Health and Social Affairs (KIHASA), former President of the Korean Pension Association

On the 19th of last month, an international seminar hosted by the Pension Future Forum was held at the National Assembly. In this column, I would like to introduce the evaluations of experts from Norway, Australia, and Japan among the attendees of the 18th OECD Pension Experts Meeting.

Dr. Herman Kruse of Statistics Norway has been responsible for the financial projections of the Norwegian pension system as a public official. He stated that the sustainability of the pension system was significantly improved by the 2011 reform. This is because a mechanism to adjust benefit amounts according to increases in life expectancy was introduced.

Norway finances its pension from income taxes. Based on total earned income, 18.1% is accumulated in the worker's pension account as income tax. The government holds this as reserves in individual accounts, and when a pension is claimed, it is paid until the time of death. Norway's income replacement rate, with a contribution of 18.1%, is 42%. Despite contributing more than twice as much as we do, they provide an income replacement rate at our level. He mentioned that pension payments in Norway are not fully guaranteed by law. This is because changes to indexation regulations, which are closely linked to reserves, can affect an individual's pension rights. However, he noted that it can be seen as being operated in a way that is nearly guaranteed.

The noteworthy point is that they have carried out pension reforms without political backlash. He said this is because politicians broadly understand that pension reform is a long-term issue. Since the opposition party handles pension issues while considering the time when they become the ruling party, reforms that the public may not like were possible. He stated that by operating the pension reform discussion process transparently and seeking political solutions while listening to the views of neutral experts, even large-scale reforms could be easily implemented. He said this is a lesson that can be shown to Korea. He warned, "If politicians do not participate in proper pension reform, doing nothing will lead to the worst possible outcome."

He stated that he is certain the Korean pension system is no longer sustainable. He said this is because the income replacement rate is 40%, while the contribution rate is only 9%. He explained that the promised pension amount payable far exceeds an individual's contributions. He asserted that increasing the contribution rate is inevitable, and to increase the income replacement rate, the contribution rate would have to be raised much further. Despite speaking cautiously as a public official, he emphasized that he is certain the Korean pension system is no longer sustainable and that contributions must be increased.

Dr. George Kudrna of the University of New South Wales in Sydney, Australia, mentioned implications related to the Age Pension—Australia's sole public pension—and the elderly poverty rate. The Australian Age Pension, with a maximum benefit amount of approximately 30% of average income, is financed by the government's general budget. He stated that about 25% of people are disqualified from receiving benefits due to means-testing, even if they meet the pension eligibility conditions. He projected that the Age Pension expenditure, which is currently less than 3% of GDP, will fall to 2% of GDP despite population aging.

He said this is thanks to the means test applied to the benefit amounts to be received from Australian Superannuation (corporate pensions), which are evaluated as being well-operated globally. Because corporate pensions are well-managed, the demand for public pension expenditure is decreasing sharply, and after 2060, the expenditure of the Age Pension—Australia's sole public pension—will fall to around 2% of GDP. In contrast, all public pensions in our country are in an unsustainable situation. The expenditure of the Basic Pension, which is fully tax-financed, is projected to be 3.2% of GDP in the long term, presenting a sharp contrast with Australia.

He stated that the elderly poverty rate based on net income is also very high in Australia. However, he noted that when owner-occupied housing (including costs and estimated rent) is considered, the elderly poverty rate for those aged 65 and older drops significantly to 10%. He personally presented that indicator this time. Dr. Kudrna's presentation has great implications for Korea, where the elderly poverty rate based on disposable income is very high, but the proportion of real estate holdings among older people is also high. He recommended a method to alleviate the high elderly poverty rate faced by Korea by paying an appropriate level of Basic Pension amount to those who desperately need help. In other words, he views the operation of a more well-targeted, means-tested Basic Pension than the current one as a way to drastically lower the elderly poverty rate.

Professor Masato Shizume of Ritsumeikan University in Japan emphasized the Japanese government's pension reform strategy to prevent the continuous decline in benefit amounts that the 2004 reform will cause in the long term. This is because, with the earlier defined benefit (DB) approach converted into a defined contribution (DC) type through the 2004 reform, a decline in benefit amounts is projected to be unavoidable once socio-economic conditions such as rising life expectancy are reflected. He said that, in order to guarantee higher pensions than are currently expected, measures that are unpopular with the public but increase the burden are being considered.

In the 2025 reform envisioned by the Japanese government, an increase in burdens is necessary to raise Basic Pension benefits. Professor Shizume projected that the government will pursue a plan to extend the contribution period for the Japanese Basic Pension—which, unlike ours, requires contributions to receive benefits—by five years, from the current 40 years to 45 years. This is because while Japan bears an 18.3% contribution rate, it aims to maintain an income replacement rate of 50% (based on two people in one household), meaning the income replacement rate per person is much lower than ours.

The Basic Pension in Japan, referred to as the National Pension (separate from Employees' Pension Insurance, which is a public earnings-related pension), is financed with half of the required funds from government finances and the other half from contributors' contributions. As the minimum income guarantee function weakened following the transition to a defined contribution type, the government intends to pursue reform by extending the contribution period by five years to supplement this part.

Professor Shizume mentioned the need for reform of the Korean Basic Pension, which is operated for 70% of older people. He evaluated that the Basic Pension in Korea is being operated without a clear purpose. He suggested that Korea needs to examine the minimum guaranteed pension system of Sweden, which includes supplementary provisions to supplement housing costs and other expenses for public earnings-related pensions, or the means-tested Age Pension of Australia.

Source: Asia Today (original article)