[Dong-A Debate] Raising the National Pension Income Replacement Rate (April 17, 2015)

(It is time to revisit the debate over raising the National Pension's income replacement rate that took place eleven years ago.

The consequences of that debate appear to have been deeply damaging!)

《Minister of Health and Welfare Moon Hyung-pyo recently indicated his intention to pursue National Pension reform once the ongoing reform of the Government Employees Pension is concluded. At the same time, calls have emerged for raising the National Pension's income replacement rate. The income replacement rate represents the ratio of pension benefits to the insured's lifetime average earnings and is scheduled to be reduced incrementally to 40% by 2028.

Proponents of raising the income replacement rate argue that early retirement has shortened contribution periods to the point where pension benefits amount to little more than pocket money, and that the income replacement rate should therefore be increased even if doing so requires higher contribution rates.

Opponents counter that Korea's income replacement rate is not low by the standards of advanced economies and that, under a one-person, one-pension framework, the current rate is adequate.

We present the views of two experts.》

Kim Yeon-myung, Professor, Department of Social Welfare, Chung-Ang University In Favor: The National Pension may suffice as pocket money, but it is far too low to cover living expenses. In nominal terms, pension benefits represent 40% of the insured's own average earnings, but this figure presupposes forty years of contributions.

Given the worsening trends of late entry into the labor market and early retirement, forty years of contributions is unattainable. The actual average contribution period is, at best, approximately twenty-five years, which would yield an effective income replacement rate not of 40% but of 25%.

At current benchmarks, a person whose lifetime average monthly earnings are approximately 2 million won and who has contributed to the National Pension for twenty-five years would receive roughly 500,000 won per month in pension benefits—an amount that falls below the 2015 minimum cost of living for a single-person household of 620,000 won.

A person earning the average wage who pays contributions over an entire working life would, in the end, receive pension benefits that do not even reach the minimum cost of living. This is the reality.

The National Pension was established to allow retirees to maintain a minimum standard of dignity in old age. Yet the system is so inadequate that avoiding poverty altogether may itself be considered a fortunate outcome, to say nothing of maintaining dignity. This is the most fundamental reason why the National Pension benefit level must be raised substantially.

(omitted)

Yoon Seok-myung, Research Fellow, Korea Institute for Health and Social Affairs (KIHASA); Adjunct Professor, Department of Economics, Korea University Against: Calls have been raised to increase the National Pension's income replacement rate in order to strengthen the function of the public pension system.

The argument holds that two rounds of reform have reduced the income replacement rate so significantly that adequate old-age income security has become difficult to achieve, and that the income replacement rate should therefore be raised further to strengthen the National Pension's income-security function.

While the call to strengthen the National Pension's income-security function and make the pension a genuine pension may sound appealing at first, closer examination reveals that the argument is fraught with problems.

As of 2015, the applicable income replacement rate for the National Pension—measured for a median earner with a forty-year contribution record—stands at 46.5%, declining by 0.5 percentage points per year until it reaches 40% in 2028.

For any substantive debate to take place, it is first necessary to establish the shared understanding that the 40% figure—which has come to symbolize a "pocket-money pension"—is the income replacement rate that will apply to future generations who join the National Pension in 2028.

Those who enrolled in the National Pension from 1988 received a rate of 70% for the first eleven years and 60% for the following ten years.

Since the 40% rate will not take effect until 2028—thirteen years from now—the income replacement rate for National Pension contributors in their mid-forties or older already exceeds 50% by a considerable margin.

It is also necessary to examine whether a 40% income replacement rate, even in a mature pension system, truly represents such a low level as to amount to mere pocket money.

According to the OECD report Pensions at a Glance 2013, the income replacement rates for median earners in major countries are as follows: Korea (43.9%), Germany (42.0%), the United States (41.0%), and Japan (37.5%).

This demonstrates that Korea's National Pension income replacement rate is by no means low.

The same conclusion holds when actual pension benefit amounts are compared.

While the average monthly National Pension benefit in the United States is approximately 1.45 million won (USD 1,261 per month), the average monthly pension benefit for National Pension contributors in Korea with twenty or more years of contributions reaches approximately 1 million won.

Taking into account the difference in income levels between the two countries, Korea's National Pension benefit amount is by no means small.

Despite these facts, the perception that the National Pension's income replacement rate is low stems from the large gap between actual contribution periods and the income replacement rate—a gap attributable to the short history of the scheme. Because the scheme has been in existence for a relatively brief period, the actual available contribution period is correspondingly short.

https://n.news.naver.com/article/020/0002779340?sid=110