[Joo Jeong-wan, Editorial Writer, Reports] National Pension Unfunded Liability to Reach 1,820 Trillion Won by 2095 — Automatic Adjustment Mechanism Must Be Introduced Without Delay

70-Year Cumulative Pension Burden: 6,358 Trillion Won

On the surface, a state guarantee of National Pension payments sounds like an uncontroversial proposition; in reality, the situation is far more complex. To guarantee pension payments by law is tantamount to making the state legally responsible for the large-scale pension deficits expected in the future.

In the end, the government would have no choice but to cover the shortfall either by raising taxes substantially or by issuing deficit-covering government bonds. As deficit bond issuance expands, the ratio of national debt to gross domestic product (GDP) rises in step. A sharp increase in the national debt ratio risks triggering a downgrade of the country's sovereign credit rating and destabilizing the foreign-exchange market.

According to the "Third Long-Term Fiscal Projection" submitted by the government to the National Assembly in September of last year, the National Pension Fund is projected to be completely depleted by 2064.

That is the point at which those born in 1999 will reach age 65 and begin drawing old-age pension benefits. The National Assembly Budget Office projected that, thereafter, the National Pension Fund would face an annual shortfall of more than 200 trillion won.

This means that pension contributions (revenue) paid in by the working generation will be wholly unable to cover pension payments (expenditure) owed to the retired generation.

If the entire shortfall were to be covered through deficit bond issuance, the national debt-to-GDP ratio would rise by 6 percentage points each year.

How large is the National Pension burden for which the state will ultimately be responsible? In technical terms, this is referred to as "pension actuarial liability."

According to a report by the National Assembly Budget Office ("Analysis of the Fiscal and Policy Effects of the 2025 Amendment to the National Pension Act"), the National Pension actuarial liability — the sum of all pension payments to be made over the next 70 years — stands at 6,358 trillion won. This figure represents the present value, as of end-2024, of all amounts that will be owed to pension contributors in the future.

"National Debt Ratio Could Exceed 300%"

It should be noted that the state is not required to bear the full actuarial liability on its own. Insufficient as they may be, there are also revenue streams from pension contributions paid in by the insured, as well as returns generated by investing surplus assets (fund investment returns).

After netting all revenues against all expenditures, the residual shortfall is referred to in technical terms as the "unfunded liability." The National Pension unfunded liability estimated by the National Assembly Budget Office amounts to 1,820 trillion won. This is the amount by which projected National Pension expenditure over the next 70 years exceeds the sum of pension contribution revenue and fund investment returns.

The astronomically large unfunded liability of the National Pension emerged as a contentious issue at a meeting of the private advisory committee of the National Assembly Special Committee on Pension Reform held in November of last year.

Committee Member A stated that "when the national debt ratio is estimated to include the National Pension unfunded liability, it exceeds 300% of GDP as of 2095," adding that "this is an unsustainable system, and it is a reality we must confront." The member further explained that "the concept of unfunded liability was used in a 1994 World Bank report to highlight the fiscal unsustainability of public pension systems."

Committee Member B countered that "(the unfunded liability) has a conceptual problem in that it varies greatly depending on the assumptions used," asserting that "it is a highly contested concept that has yet to be conclusively defined." The point was that the scale of the unfunded liability could change significantly depending on how various economic and social variables — such as population trends and economic growth rates — evolve in the future.

In response, Committee Member C argued that "the very concept of unfunded liability refers to the emergence of an actuarial imbalance," and that "in principle, whenever an actuarial imbalance arises, it is a subject addressed by politicians, the press, and academics alike in most advanced countries, including the United States."

The Latent Pension Liability That Roh Moo-hyun Also Warned About
Warnings that enormous pension liabilities would accumulate in the future were sounded even during the Roh Moo-hyun administration. At the time, the term used was "latent liability" rather than "unfunded liability."

In a special address delivered in June 2007, President Roh stated that "the National Pension alone is accumulating latent liabilities at the rate of 80 billion won per day, reaching 30 trillion won per year," and emphasized that "the opposition party must not obstruct passage of this legislation (the National Pension Act), which will otherwise leave an enormous burden on our children's generation."

This was an appeal to the then-opposition party (the Grand National Party), which had been displaying a passive attitude toward pension reform, urging its cooperation in processing the bill.

https://www.joongang.co.kr/article/25395660