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Korea's pension to run out faster on population decline

Jan. 27, 2023 - 14:44 By Son Ji-hyoung
This photo taken on Wednesday shows senior citizens who are provided with free meal in Jongno-gu, Seoul. (Yonhap)

South Korea's public pension reserve is set to run out from 2055, two years earlier than the previous projection, in the face of rapidly changing demographics coupled with slowing economic growth, according to officials on Friday.

A Health Ministry committee on the financial projection of the National Pension Service announced that the reserves will be depleted by 2055 as the fund is expected to fall from 2041 onward.

A depletion will force the working population to provide more than 26 percent of their income to retired people as pension benefits, the projection also showed, unless the cost of doing so is partially or entirely sourced from the state budget.

This is more worrying for the world's third-largest pension fund, as the same estimate five years ago indicated that the pension will run out in 2057.

The 12-member committee, led by Korea Institute of Public Finance Senior Fellow Jeon Byung-mok, cited a projected decline in contribution due to the shrinking young generation compelled to pay premium, and a projected increase in pension expenditures due to a growing number of older, retired people.

The projection also indicates that those subject to compulsory contribution to the public retirement plan must double their contribution starting in 2025 to keep the pension's accumulated reserve the same as its annual expenditure 70 years later. Delaying that until 2035 will require a 2.3-fold hike instead.

What is more concerning is that the gloomy projection is based on a moderate scenario, under which the nation's falling birth rate would start to rebound in 2025. The projection is also based on a premise that no pension reform will have taken place. Korea's fertility rate has declined for seven straight years, and stood at below 1 for the past four years until 2021, according to 2022 statistics.

The projections "indicate a need of pension reform" in Asia's fourth-largest economy, Jeon told a press briefing at the Government Complex Seoul Friday.

"The more delays there are in carrying out the pension reform, the heavier financial burden the future generation has to bear."

Jeon Byung-mok, head of a 12-member pension projection committee under the Ministry of Health and Welfare, speaks at a press briefing held in Seoul Friday. (Yonhap)

A final projection, showing a range of outcomes depending on various scenarios, will be announced in March. This will lay the basis for a five-year pension initiative, which could involve a pension reform plan, and would need to be approved by President Yoon Suk Yeol in September and proposed to the National Assembly in October.

The current national fund requires an employee and the employer to pay a matching contribution equal to 9 percent of the employee's monthly earnings. The employees will theoretically receive up to 40 percent of wages in pension benefit each month beginning at the age of 65. But, depending on the period of time he or she has worked, their pension benefit will potentially be reduced to 25 percent or lower, according to the NPS.

Earlier in the 2018 pension planning, the government proposed two pension reform options to slow down the speed of depletion, but neither took root. One was to increase contribution immediately to 11 percent and have the retired receive more benefits, and the other was to carry out a gradual hike and keep the level of benefits unchanged.