[Commentary] The Dispiriting State of Public Pensions (August 5, 2015)

(This is a column that emphasized, already a decade ago, that the most serious problem with Korea's National Pension was not the income replacement rate but rather the short contribution period attributable to a rigid labor market.)

Germany, long renowned for its generosity, likewise carried out sweeping reforms. In 2004—the same year as Japan—Germany introduced an automatic adjustment mechanism even stronger than Japan's.

Germany introduced an automatic adjustment mechanism of pure design that automatically reflects not only population aging and low growth but also declining fertility rates in pension benefit levels.

As a result of implementing proper measures, the income replacement rate, which had stood at 70%, has already fallen to the low 40s, and the contribution rate required to sustain this level is around 20%.

As of 2015, Korea's National Pension income replacement rate stands at 46.5% (with a contribution rate of 9%), which is higher than Germany's level of approximately 43%.

Despite this, calls have been raised to raise the income replacement rate back to 50% on the grounds that old-age income security remains insufficient.

This is being argued while ignoring the fact that raising the income replacement rate to 50% would generate a 4 percentage-point increase in the required contribution rate, and that the contribution rate needed for fiscal stabilization would need to be at least 16%.

Also problematic is the projection that, if current labor market patterns continue unchanged, raising the income replacement rate from 40% to 50% would yield an actual increase in the effective income replacement rate of only 2.8 percentage points by 2050—35 years from now.

This is because the average contribution period is too short to translate statutory improvements into actual benefit gains.

This suggests that the core of the problem lies not in the income replacement rate but in how much the contribution period can be extended by encouraging workers to remain in the labor market longer.

The reason Germany—which has allowed its pension benefit rate to fall into the low 40s—is able to operate its pension system without major difficulty is also that its average contribution period is long.

Korea, where the elderly population is growing at the fastest rate in the world, must undertake reforms even stronger than those of Japan or Germany in order to expect comparable effects. Amid all of this, observing a society in which pension issues—along with broader welfare concerns—remain mired in partisan political conflict can only elicit a sigh.

https://n.news.naver.com/article/011/0002721735?sid=110