(Seoul Economic Daily Report, October 18, 2018) If the Income Replacement Rate Is Raised to 50%, Will the Contribution Rate Double? — Kim Yeon-myeong: "Is the Government Running a Pension Just to Pile Up a Fund?" (Posted September 4, 2026)
The government, which is preparing to submit its National Pension overhaul plan to the National Assembly at the end of this month, is in a bind. The reason is that opinion remains sharply divided over the income replacement rate—the benefit level that forms the pension's most basic framework, the figure that determines how much a person will receive. Ranged against each other are those who say, "It must be raised to at least 50%, as the president pledged," and those who counter, "This is no time to argue from ideals alone. Given the contribution increase that would come with any rise in the income replacement rate, we have to be cautious." The argument between them is fierce. Some two weeks of intensive public consultation have now come to a close, but a "social consensus" remains lost in the fog. Part of the reason is that the government did not first put forward a clear proposal and then ask the public what it thought, so the debate was bound to sprawl in every direction.
In the meantime, the debate over the public pension system as a whole is darker still. President Moon Jae-in and the government have stressed repeatedly that this round of discussion should proceed under the larger goal of strengthening old-age income across the board—not only the National Pension but the Basic Pension and retirement pensions as well—yet the risk that this will turn out to be empty talk has grown. What is it about the income replacement rate that makes it so sensitive?
On the 5th, the Ministry of Health and Welfare and the National Pension Service (NPS) brought to a close their long march of public forums on the National Pension overhaul, held across all 16 metropolitan cities and provinces. Seventeen rounds of small-scale roundtables with ten focus groups—older people, young people, the business community, the labor sector, and others—and the gathering of views online through the NPS website and other channels are also being wrapped up.
The National Pension scheme was first introduced in 1988 and has since undergone an overhaul every five years, in step with each financial projection. This year marks the fourth projection. This is the first time, however, that the government has gathered the views of ordinary citizens so broadly. It began after public feeling boiled over at the overhaul plan released last August by the National Pension System Development Committee, a government advisory body; the alarmed government set out to hear the public directly and to forge a social consensus. The intent was admirable, but a social consensus looks a long way off—because the differences among the various sectors over the National Pension's income replacement rate are proving stubbornly hard to narrow.
◇Income Replacement Rate = The Pension Received After a Full Forty Years of Contributions
The income replacement rate refers to the ratio of pension benefits to the average of the income an individual earns over a lifetime (lifetime average earnings). Put simply, it is an indicator of how the money one receives as a pension compares with the money one earned working in one's younger years. As of 2018 the National Pension's income replacement rate is 45%, which means that if one's lifetime earnings averaged 1 million won a month, one would receive 450,000 won a month from the National Pension from the age of 65.
When the scheme was first introduced, the income replacement rate was 70%. Successive overhauls, however, have shifted it downward instead of raising contributions. Even the current 45% is set to decline by 0.5 percentage points a year until it reaches 40% in 2028. However much the income replacement rate keeps changing, contributors receive their pension later on according to the rate in force in the year they enrolled.
Because it is the yardstick that determines benefit amounts, it is of course closely bound up with the contribution rate, the money contributors pay in. To increase the money received (the income replacement rate), the money paid in (the contribution rate) has to rise as well, because that is the only way the fund's balance between contributions and benefits holds.
Earlier, the Development Committee had put forward two options: Proposal (A), which would stop the income replacement rate from falling any further and fix it at 45%, and Proposal (B), which would hold to 40% as the current rules provide. Proposal (A) would raise the income replacement rate but lift the contribution rate by 2 percentage points immediately. Proposal (B) would leave the income replacement rate untouched and instead raise the contribution rate more slowly, a little at a time.
◇"The Income Replacement Rate Must Be Raised, No Matter What" VS. "You Can't Just Talk About Ideals"
One point to be careful about is that the income replacement rate is fundamentally the ratio of pension benefits calculated on the basis of forty years of contributions. In other words, an "income replacement rate of 45%" means that a contributor who pays in for a full forty years receives that much. If the contribution period is short, the effective income replacement rate falls below 45%. Korea's National Pension has been in existence for only thirty years since it was first introduced. As a result, the effective replacement rate for contributors as of this year averages a mere 24%. That is also the background to the jibe that it is a "pocket-money pension."
The labor sector and civic organizations take a hard line: the income replacement rate must be raised to at least 50%. It was also a pledge President Moon made when he was a presidential candidate. The labor sector's basic position is that once the income replacement rate is raised, it will consider a contribution increase as well. Eun Jae-sik, Secretary-General of the Woori Welfare Citizens' Coalition, stressed that "lowering the income replacement rate would only erode confidence in the National Pension further," and that "our task is to keep raising benefit adequacy." There are also voices insisting that the income replacement rate be raised with no increase in contributions. Kim Jeong-a, policy director of the Ulsan regional branch of the Korean Confederation of Trade Unions, argues that "rather than raising contributions, we should raise the fund investment return rate or cover the cost out of taxes."
The business community, which pays half of every workplace-based contributor's contributions, and small business owners and the self-employed, who must pay the full amount themselves, balk at arguments of this kind.
Kim Dong-wook, Director of the Social Policy Division at the Korea Enterprises Federation, says that "once long-term finances are taken into account, we have to be open even to lowering the income replacement rate below 40%," and adds:
"At present the (corporate) National Pension contribution burden runs to 40 trillion won a year, and raising the contribution rate by just 1 percentage point would add 4 trillion won."
Among experts, too, voices can be heard saying that raising the National Pension's income replacement rate is not the only answer.
Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs, said that "in Germany, assuming an average contribution period of forty years, the effective income replacement rate is 35%," and that
"the 27 European Union (EU) countries average only 38%," pointing out that Korea's current replacement rate of 40% is not low.
There is also criticism that insisting blindly on a higher income replacement rate, bound up in an excess of idealism, is itself the problem.
One citizen in their sixties who attended the public forum in the Daegu region on the 5th said, "The whole point is to discuss ways of making sure that even generations far in the future can receive their pensions reliably—so what are we doing calling for the income replacement rate to be raised even higher?" and added:
"Rather than making idealistic claims about things that cannot be done, we should be talking about realistic ways of shouldering the responsibility together."
The Institute for Democracy, the think tank of the Democratic Party of Korea, likewise argued in a report published last August that
"calling for a further increase in the National Pension's income replacement rate is a pernicious argument that reinforces the current generation's 'moral hazard,'" and that
"most of the older people who fall within the elderly poverty rate are people 'outside the National Pension system,' so it is better to strengthen the Basic Pension."
◇Debate on the "Big Picture" of Strengthening Old-Age Income Has Stalled
The government looks unable to move in either direction. Internally there is a shared view that fixating on the nominal income replacement rate yields little real benefit.
One senior government official said that "an income replacement rate of 45–50% only holds when the contribution period is forty years or more," adding that "it is more important to narrow the coverage gaps and lengthen contribution periods through various credits, contribution subsidies and the like."
The point is that what is needed far more urgently are measures capable of raising the effective income replacement rate, rather than the nominal one. There is the further burden that raising the income replacement rate itself would inevitably mean a steeper increase in the contribution rate.
Even so, what keeps the government and the political sphere from broaching the subject boldly is the political cost. With the first contribution increase in twenty years now in prospect, announcing that the income replacement rate will be left as it is could only deepen public discontent.
While everything stays tied up in this wrangling over the National Pension's income replacement rate, discussion of how to put substance into each of the individual schemes—"National Pension + Basic Pension + retirement pension"—and to strengthen the multi-tiered old-age income security system has made no progress at all.
The Basic Pension is going it alone, moving up its schedule of increases for low-income older people, while retirement pensions have in effect been left untended.
Yang Jae-jin, Professor at Yonsei University, advised at a National Assembly forum last month that "if retirement pensions play their proper role, I think a benefit rate of 40% is acceptable," adding that "alongside a robust basic guarantee, we must also work to build a society in which older people are able to work."
Oh Gun-ho, Chair of the Steering Committee of Welfare State I Make, likewise said that "the discussion should be opened up within a multi-tiered framework that structurally reorganizes the Basic Pension and retirement pensions."
There are also hopes that the government, welcome as its active canvassing of public opinion may be, will draw up a proposal with a clearer sense of direction and make the effort to win people over to it.
One citizen in their fifties who attended the public forum in the Seoul region last month put it pointedly: "Rather than the president and the government hiding behind a 'social consensus,' the proper thing to do would be to draw up the proposal the public interest requires and persuade the people of it."
/Reporter Bin Nan-sae [email protected]
https://n.news.naver.com/article/011/0003410006?sid=101
