Pension Reform — Learn From Germany and Japan

[Hankook Ilbo · Deep&wide · March 31, 2025]

Yun Suk-myung, Research Fellow Emeritus at the Korea Institute for Health and Social Affairs (KIHASA)

There is something that must not be overlooked in the debate over the National Pension. It is the path dependence of pension policy. This means that the task is to resolve problems inherent in a system that has been operated for a long time, rather than starting from a blank slate.

Our public pensions were introduced based on Japan's experience with the German Bismarckian pension system. The Bismarckian model was designed to provide generous pensions so that couples could live in their old age during an era when only husbands were economically active. However, Germany and Japan themselves abandoned the principle of "generous pensions" and ensured the sustainability of their pension systems by introducing an automatic adjustment mechanism in 2004.

Germany compensates for the negative impact that trends in the fertility rate, life expectancy, and economic growth rate have on the pension system through the sustainability factor. If it is determined that the sustainability of the pension has decreased due to these factors, the system is automatically corrected to ensure it remains sustainable.

Japan introduced an automatic adjustment mechanism based on the concept of the "macro-slide" in 2004. While reflecting changes in social and economic conditions in the pension, it established an automatic adjustment system capable of achieving fiscal stabilization under various set scenarios. Japan raised contributions to 18.3% to achieve a balance between contributions and benefits. This is why a "100-year strong pension," which secures funds to pay one year's worth of pensions even 100 years from now, became possible.

Of course, while the introduction of an automatic adjustment mechanism achieves fiscal stabilization, it brings about the question of whether an appropriate level of pension can be received. Japan is resolving this by setting an "income replacement rate of 50%" as the floor for a minimum income guarantee. It should be noted that the "income replacement rate of 50%" in the Japanese pension system is based on a couple, meaning it is an income replacement rate for two people. It is the total income replacement rate for a household consisting of a working husband and a full-time housewife.

When converted to a single-person income replacement rate identical to ours, it remains at the 32.4% level. It should be noted that although the contribution rate (18.3%) is much higher than ours, the income replacement rate is much lower. A "structure of paying much more and receiving much less" than in Korea is the background that allowed them to secure funds to pay pensions even 100 years from now.

Germany and Japan, from whom we have learned about pensions, are countries that provide significant implications in terms of path dependence. Japan also offers great implications regarding the integrated operation of public pensions. Since 2015, civil servants have been subject to a pension system 100% identical to that of the general public. This is because of the stark difference from our Government Employees Pension, which requires the injection of 10 trillion won in taxes for deficit subsidies this year alone.

Source: Hankook Ilbo (original article)