(TBS Traffic Broadcasting, Live Broadcast of May 6, 2015) <Open Morning, This Is Ko Seong-guk> Professor Kim Yeon-myeong of the Department of Social Welfare at Chung-Ang University “Raising Contributions by Just 1% More Would Make a 50% Income Replacement Rate Possible” Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs “According to the OECD Report, the Income Replacement Rate (Posted September 4, 2026)
May 6, 2015, 1:06 p.m.
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<Professor Kim Yeon-myeong>
The Maximum Reform Possible, Reached Through Compromise
A 50% National Pension Income Replacement Rate, the Figure Agreed On as the Optimal Target in the 2007 Reform
<Yun Suk-myung, Research Fellow>
The Worst Reform of All, Absurdly Meddling With the National Pension
At the Working Group's Final Decision-Making Meeting on the Income Replacement Rate, the Ministry of Health and Welfare's Responsible Official Was Absent...
As the ruling and opposition parties reached agreement on the Government Employees Pension reform plan, the sparks landed on the National Pension. The proposal to raise the pension paid to the insured from 40% of income to 50% is what has become controversial. To receive more you have to pay more—surely that much is obvious. But on just how much more has to be paid, even the experts are somewhat divided. So today we are going to take a look at this question. We have two guests. Our first is the man who, as a member nominated by the opposition party to the working group on Government Employees Pension reform, laid the groundwork for this reform plan. Professor Kim Yeon-myeong of the Department of Social Welfare at Chung-Ang University joins us by telephone.
Ko Seong-guk: Good morning.
Kim Yeon-myeong: Yes, good morning.
Ko Seong-guk: Yes. And our other guest took part in Government Employees Pension reform during the Participatory Government. Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA), joins us as well. Good morning.
Yun Suk-myung: Yes, good morning.
Ko Seong-guk: Yes. And let the two of you say hello to each other.
Yun Suk-myung: Hello.
Kim Yeon-myeong: Yes, good to see you, Dr. Yun.
Ko Seong-guk: Now then, let me start by hearing briefly from each of you on how you assess this reform plan. Professor Kim Yeon-myeong first: how do you assess this agreement between the ruling and opposition parties on the reform plan?
Kim Yeon-myeong: Depending on how one looks at it, the Government Employees Pension reform does fall short in places, but I believe we carried out the greatest reform we were capable of—one that found a middle ground between the position that reform must be done and the position that it should be done only to a modest degree.
Ko Seong-guk: So your assessment is that, realistically, it was an agreement that did the best that could be done. Committee Member Yun Suk-myung?
Yun Suk-myung: Yes. The fiscal instability of the Government Employees Pension is an extremely serious problem, and the call was to fix that problem properly. Yet the various problems—beginning with the fiscal stabilization of the Government Employees Pension, which is where the real trouble lies—went unaddressed, while the National Pension was meddled with instead. On that count, this looks like the worst case in the pension reform debate to date.
Ko Seong-guk: The two of you assess it quite differently. A moment ago, Committee Member Yun Suk-myung, you were saying that the Government Employees Pension reform that had actually been called for was left untouched while the National Pension was meddled with as well, and that the problem has become serious as a result—is that right? What do you see as the problem with this ruling–opposition agreement on the National Pension?
Yun Suk-myung: Well, in the case of the National Pension, a degree of reform was carried out after a great deal of controversy. And the important reform measure in that process—agreed after fierce argument over roughly four years, from October 2003 to July 2007—was this: since it would be difficult for the public to bear a heavy contribution burden, the political sphere agreed at the time that, in order to achieve the same fiscal stabilization, the benefit rate people receive would have to be cut further, painful as that was. Yet a reform measure achieved over four years and a great deal of controversy was this time decided all over again in the space of a few days—in one stroke, by a different body, in the course of dealing with the Government Employees Pension, and with none of the National Pension's stakeholders taking part at all. On that count the criticism seems to be running very high.
Ko Seong-guk: Yes. Professor Kim Yeon-myeong, what do you make of Committee Member Yun Suk-myung's assessment?
Kim Yeon-myeong: That is the view held by those who believe the functions of the National Pension should not be expanded—only one side of the argument. Take, for instance, the decision reached this time to raise the National Pension's income replacement rate to 50%. Is that not the most contentious point? The figure of a 50% income replacement rate was, in fact, already the subject of broad expert consensus as the optimal target during the 2007 reform process. It would be incorrect to suggest that a handful of working-level legislators who participated in that process simply woke up one morning and inserted "50%" without any deliberation. The members of our working group incorporated that figure only after thoroughly debating and persuading the representatives of both major parties—the Saenuri Party and the New Politics Democratic Union—on the question of pension reform. Within the Government Employees Pension Special Committee as well, there were three subcommittees, one of which was the Subcommittee on Old-Age Income Security. The government side, the Ministry of Health and Welfare, the Ministry of Economy and Finance, and members from both the ruling and opposition parties all participated in the discussion. To speak of this decision as though it fell from the sky suggests an unfamiliarity with the processes that had taken place up to that point.
Ko Seong-guk: Yes. Committee Member Yun Suk-myung, would you like to offer a rebuttal?
Yun Suk-myung: Indeed. If the deliberations had been as transparent as described, I doubt the Ministry of Health and Welfare—the ministry responsible for National Pension policy—would have reacted as strongly as it did, going so far as to issue a press release. Viewed from the other direction, that reaction speaks for itself. It is true that the Director-General of the Ministry attended the proceedings. However, he attended only up to the preceding stage. The Ministry's responsible official was absent from the working group's final decision-making meeting at which the National Pension's income replacement rate was determined. That point needs to be made clearly. Furthermore, regarding the assertion that consensus was reached in 2007: we had originally submitted a proposed amendment to the National Pension Act to the National Assembly in October 2003, based on the results of the first financial projection for the National Pension. At that time, the government proposal argued that lowering the rate to 40% would be too severe and that it would be preferable to maintain approximately 50%, provided that contributions were raised to approximately 15.88%–16%. However, the political sphere of the day held that raising contributions to 16% was not feasible and that, painful as it would be, the benefit rate should be cut further—and so 40% was decided upon. There is a precedent for that. The fact that such a decision is now being made abruptly, with those circumstances entirely disregarded, appears to be why many stakeholders and the media are leveling very sharp criticism.
Ko Seong-guk: Ah, Committee Member Yun—did you state at the time as well that a 50% rate would require a contribution burden of 16%?
Yun Suk-myung: To be precise, 15.88%, which is close to 16%.
Ko Seong-guk: Yes. And at that time, on the grounds that the burden was too great, the benefit rate was lowered to 40%—what contribution rate resulted from that?
Yun Suk-myung: When the rate was lowered to 40%, the proposal was to raise contributions to 12.9%—call it 13%—but even that was deemed too burdensome, and the National Assembly ultimately rejected it, leaving only the benefit rate reduced. So the government's position at the time was that 50% was preferable to 40%, but only on the condition that the contribution burden be increased accordingly. None of those conditions were accepted.
Ko Seong-guk: So you are saying we already went through exactly that seven years ago. Professor Kim Yeon-myeong, would you care to respond?
Kim Yeon-myeong: Yes. What Dr. Yun Suk-myung has just described concerns the National Pension overhaul that took place under the Participatory Government. But while the Participatory Government has various achievements to its name, I regard its single greatest failure as having cut the National Pension's income replacement rate so far that it left the entire population insecure in old age. The decision at the time was taken by agreement in the National Assembly once it had been settled that the National Pension's income replacement rate would be lowered, so the process itself cannot be denied. Afterward, however, a broad public view took hold that the National Pension had been cut too far and that this was a problem. And there is another point. Alongside the cut to the National Pension's income replacement rate came the Basic Pension, the subject of so much controversy last year. The Basic Pension was set at 100,000 won at the time, which at the level of the day came to about 80,000 won. There was a further statutory agreement to create a Basic Pension of about 100,000 won in today's terms and to raise it in stages to 200,000 won. But the Basic Pension was never raised at all after that, and it is because of problems like these that Korea's old-age income security system has ended up in considerable disarray. You should see it this way: the working group has, on this occasion, created an enormously important opportunity to overhaul Korea's old-age security system wholesale, working through a social body. If the existing system were perfect and delivered a reasonable degree of income security, why would anyone shake it up? There are substantial problems, and because the current system—the National Pension as it stands—carries a range of them, what the working group decided was, in effect, to say: let us take this occasion to put the matter to public deliberation.
Ko Seong-guk: Yes. The core of Professor Kim Yeon-myeong's argument, then, is that for the National Pension to provide old-age security the income replacement rate has to be at least 50%, and that there is broad agreement to that effect. And on that question, Committee Member Yun Suk-myung has said that the same concerns were present during the 2007 reform, but that because so large a burden was hard to bear the income replacement rate ended up being lowered to 40%—that it was an unavoidable reality. So on the proposition that 50% is necessary, Committee Member Yun does not appear to be in serious disagreement. Is that right?
Yun Suk-myung: Seen a certain way, I think that is not quite right. The 50% figure—the current OECD average is around 50%. But here—and I think a great many people keep getting this confused—our income replacement rate right now is not 40% but 46.5%. Those who enrolled from 1988 on are receiving 70% for 1988 through 1998, and 60% for 1999 through 2007. So for the cohorts now aged about 45 and over, the income replacement rate is not 40% but comes to more than 55%. What the 40% figure actually is, then, is the income replacement rate that applies to the young people who first enter the labor market in 2028. And these are people whose average life expectancy will run to something like 90 or 100. So the income replacement rate has to be applied to them in a forward-looking way. That is to say, even at a 40% income replacement rate, if the contribution period lengthens in proportion to rising life expectancy—by 50%, say—then that replacement rate can become 60% rather than 40%. So this has to be thought about in a forward-looking way. To reach back to something already more than ten years old—when we have failed even to raise contributions, when the National Pension's fiscal instability has grown far worse in the meantime, and when nothing at all has been done—and to say now that we should go backward again strikes me as a highly irresponsible argument.
Ko Seong-guk: I see. Where the appropriate line lies—the line on which a national consensus is possible—looks like something that needs further discussion. And another of the points at issue seems to be the controversy over how much additional burden will be required, now that this ruling–opposition agreement has adjusted the income replacement rate back up to 50%. Professor Kim Yeon-myeong, your argument is that in this case the additional burden need not be all that large, correct? How much of a burden do you say is required?
Kim Yeon-myeong: There is a set of figures I requested from the government side in the Grand Compromise Body's Subcommittee on Old-Age Income Security. Those are the figures behind the 10.01% now so widely talked about in the media—the claim that raising the rate by just 1% is enough. What I asked the government for was this. Assuming the current income replacement rate of 40%, the National Pension Fund is depleted in 2060, is it not? If the income replacement rate is then raised to 50%, more money goes out in pensions, so the date of fund depletion moves forward somewhat from 2060. The government's position is that it moves forward by about four years. And when the date of fund depletion moves forward, the public becomes anxious—young people in particular worry that they will not receive a pension at all. In fact there is no history of a fund being depleted and pensions then not being paid, but since people are anxious, I put the question this way: if you fix the date of fund depletion at 2060 and hold it there, how much would contributions have to rise for the income replacement rate to go to 50%? The document in which the government answered officially came back saying 10.01%. What that means is that the rate is currently 9%, and raising it by just 1% more would make a 50% income replacement rate possible. And with the National Pension contribution rate, the employee pays 50% and the employer pays the other half. So in practice, raising it by just 0.5% would make a 50% income replacement rate possible. That is not my claim; it is the government's own official answer.
Ko Seong-guk: I see. In the course of your remarks, Professor, you said that there has never in history been a country that stopped paying pensions because its fund was depleted. Is that actually so?
Kim Yeon-myeong: That is right. Countries that run their scheme on a large accumulated fund the way ours does number only five in the whole world. The United States, Japan, Sweden—only a handful of countries. Far more countries run a pension scheme with no fund at all. Take Germany. Its fund holds only about a week's worth, eight days' worth. So if contributions and taxes are not collected this week, pensions cannot be paid next week.
Ko Seong-guk: Ah, so that is how they run it.
Kim Yeon-myeong: So whether the German way of running it is better, or running it on a large accumulated fund as we do is better, is now the subject of enormous debate in the academic world. But to think that once the fund is depleted no pension can be received is a misunderstanding.
Ko Seong-guk: We are running out of time, so I should give Committee Member Yun Suk-myung the last word. You have heard Professor Kim Yeon-myeong out on the question of the additional burden. Committee Member Yun, what is your view?
Yun Suk-myung: What matters, I think, is how the question was put to the Ministry of Health and Welfare in the first place. That answer, I suspect, came out because the question was framed with a hard cutoff at 2060. The problem is that if things are as Professor Kim says, then the contribution rate that would have to be collected from 2061 on—once the fund is gone—would be at least 21.5%, and that is even if the rate is held at 40%. And if it is raised to 50%, that cost goes higher still. So the point is that, depending on where we set the reference date, the assessments come out at opposite extremes. Professor Kim said a moment ago that no country has ever paid a pension and then stopped paying it. To take one clear case, after the 2008 global financial crisis Greece, having no money, cut benefits by 50% overnight, as I understand it. So these are things we have to think about as well. On the contribution burden, the OECD's report last year already states that if we raise the benefit rate to 50% we would have to raise contributions to at least 16.7%. It is there on page 22 of the OECD report. And as for Germany having only a day's, two days', a week's worth—one thing is clear: what Germany finances within the year out of that year's revenue is its government employees pension. It is not the general national pension. In 2007 the scheme was switched to a 100% funded basis for newly appointed government employees. So for government employees who have joined since 2007, contributions equivalent to 35% a month—35% of salary—are already being accumulated.
Ko Seong-guk: I see. We are out of time, so we will have to leave it there for today. Listening to our two experts, I am struck once again that the National Pension—right down to the question of whether it should be a funded system or pay-as-you-go—has to be put to public deliberation through a genuinely proper national debate, and that a conclusion has to be reached. Thank you both for your remarks today. Thank you.
Yun Suk-myung, Kim Yeon-myeong: Yes, thank you.
Ko Seong-guk: Our guests have been Professor Kim Yeon-myeong of the Department of Social Welfare at Chung-Ang University and Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs.
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