The funding shortfall of South Korea’s national pension is a growing concern. According to the latest estimates, the fund is projected to run out by the mid-2050s unless additional contributions or funding are secured.

With South Korea’s population declining and fewer workers entering the job market, the number of retirees is increasing, putting pressure on the pension system. This issue is one of the most urgent challenges the country must address to avoid future financial instability.

Historically, when nations failed to pay pensions, it often led to unrest or revolt. In ancient Rome, a pension shortfall for retired soldiers contributed to military leaders taking control of the republic. These leaders either waged wars to seize wealth from neighboring nations or raised taxes forcibly to cover the pension deficit.

Essentially, a pension shortfall must be addressed either by external means such as military conquest or internally, through increased taxation.

Some argue that the National Pension Service should invest more wisely to generate returns that could cover the shortfall. However, this perspective overlooks the fact that most NPS employees are career civil servants with limited experience in managing investment risk, particularly in the capital markets.

Expecting these employees to produce significant returns from stocks and bonds is unrealistic. It is like asking domesticated animals, accustomed to being fed regularly, to survive in the wild, where survival depends on skill and risk-taking.

The idea of entrusting the NPS with large sums of money to invest in high-risk ventures, like private equity, is even more dangerous. While private equity firms may promise high returns, they often leave investors with limited gains and increased risks. Relying on these firms for returns can lead to wasted funds and long-term financial entrapment.

Another grave mistake committed by the NPS is to invest in overseas real estate properties. Real estate requires specific market knowledge and local networks in order to generate the returns that real estate professionals tout. Passively investing in real estate or investing indirectly via outside managers will not provide returns that surpass the stock market index.

Investors with only a basic understanding of the markets may take unnecessary risks or make poor decisions, believing they know more than they actually do. As Warren Buffet said, “a little knowledge is more dangerous than no knowledge.”

So, how can the NPS resolve the fund shortfall problem? The solution is relatively straightforward. The NPS should raise the pension eligibility age and reduce the government deficit and government debt to ensure that, if necessary, the government can step in to cover any gaps. Increasing the pension contribution may encourage younger workers to opt out of the system, while lowering pension payouts would increase the financial strain on retirees, especially in an inflationary environment.

While some politicians may advocate for raising pension payouts, this could exacerbate the problem by depleting the fund more rapidly.

In the meantime, the NPS should adopt a more passive investment strategy, focusing on stock index funds and short-term bonds. This would minimize the need for expensive external managers who often charge high fees but fail to deliver returns that outperform the market. Furthermore, the NPS should halt hiring new employees until the funding shortfall is resolved in order to reduce overhead costs.

By implementing these reforms, South Korea can stabilize its national pension system and ensure it remains sustainable for future generations.

Tae H. Park

Tae H. Park is a professor of finance at Concordia University. He served as deputy CIO at KIC and CIO at Shinhan Asset Management Company. The views expressed here are the writer’s own. — Ed.


koreadherald@heradcorp.com