Pension Future Forum_International Comparison of Public Pension Types (1), Yoon Seok-myung, Joo Eun-sun, 2000

(Summary Version)

To calculate the income replacement rate using a Notional Defined Contribution system, assumptions are required about the economic growth rate of the relevant economy and the level of contribution burden borne by the insured and their employers.

Assuming 2% annual real economic growth and a 15% contribution burden level, 〈Appended Table 1〉 calculates the projected income replacement rate of pension benefits if a Notional Defined Contribution (NDC) system is introduced.

〈Appended Table 1〉 takes age 25 as the reference age for calculating the income replacement rate of pension benefits. As the reference income of a given insured person, the average monthly wage of Korean workers with 1–2 years of experience across all industries and occupations, converted into an average annual wage, was used.

The accumulated assets in the Notional Defined Contribution account needed to calculate the income replacement rate were computed as the sum of each year's contributions from the insured and their employers, plus the fund growth rate (real economic growth rate, 2% per year) applied to contributions already made.

Assuming that a person who was employed for 35 years from age 25 to age 59 begins receiving pension benefits at age 60, the income replacement rate is calculated to be 38.7% when the contribution burden level is 15%.