On April 5, a demonstration against President Macron's pension reform was held in Paris, France. The demonstration lasted for three months, and protesters burned banks and restaurants in Paris. The local police shocked international society by using tear gas and clubs to suppress the demonstrators. As this situation has been reported on in Korea, people are paying attention to how pension reform, one of the three major reforms proposed by the Yoon Seokyeol government, will be carried out.
A sloping balance of generations
The National Pension, one of the four major insurances, is a social security system implemented by the state to guarantee citizens' old age income. This system helps people live a basic life by paying out monthly pensions when they retire and can no longer earn money or are unable to continue working due to disabilities. The fund is maintained by steadily collecting insurance contributions every month from working citizens. Until the 1970s, Korea implemented a social security system centered on poor relief policies, but it established a full-out social security system through the creation of the national pension system in the 1980s. The reason why this system was needed was the increase in life expectancy. In the past, the average life expectancy of people was shorter, and the government didn't feel much of a need to support the elderly, but now the situation has changed due to medical technology advances. In Korea, where the support of the elderly is shrinking, it is not easy to prepare for old age, and the government eventually had to create a new system. The public pension created in this way is based on community solidarity among members of society and intergenerational support systems.
However, the need for pension reform emerged as the ratio between the working age population and the elderly population showed a large difference. The National Statistical Office reported that if the current trend continues, the working age population and the elderly population will be of equal size in 2067. It suggests that one working person will have to support one elderly person. Among OECD member countries, Korea ranks first in the poverty rate of the elderly, more than 2.5 times higher than the average poverty rate of the elderly in other countries. On the other hand, public pension income stood at 29.7 percent, much lower than 76.6 percent in the UK and 63.6 percent in Japan.1) This shows that the significantly lower money paid out as pension compared to other countries can contribute to increasing the poverty rate of the elderly. In the midst of this, the number of working age people contributing to the economy is gradually decreasing, and the national pension funds are rapidly running out. The National Pension Fund Financial Estimate Expert Committee analyzed that if the pace of depletion continues, the accumulated funds will be exhausted in 2055. This was a spark to ignite the National Assembly and the government's push for pension reform as the exhaustion deadline is now put at two years earlier than the previous analysis.
A dilemma that neither side can easily take
As pension reform begins in earnest, opinions are divided on how to reform the system. The plan for reform can be divided into parameter reform and structural reform. In the case of parameter reform, it is argued that the national pension insurance rate and income replacement rate should be adjusted while maintaining the existing system framework. There are disagreements about raising the income replacement rate, but the general thought is that raising the insurance rate to continue the current pension system in Korea is inevitable. The administration has attempted reform, focusing on these parameter reforms. However, the National Assembly's Special Committee on Pension Reform caused confusion by saying that it should start with structural reform without discussing the insurance rate and income replacement rate. Structural reform is focused on modifying the structure to change the function and role of the system itself. This is because the current national pension has a distorted income redistribution function. If pension subscribers report their income as less than their actual income, the country cannot properly confirm the income of the working generation. In response, economist Lee Youngha pointed out, "Local subscribers' income underreporting hinders the rise in a level annuity and earnings-related pension by lowering the average income of all subscribers."2) Since an increase in people's income leads to an increase in the amount of pension, a decrease in average income also lowers the earnings-related pension amount. This eventually leads to a failure of income redistribution, making it difficult to solve the poverty rate of the elderly. As opinions are not easily integrated over the direction of reform, more communication seems to be needed for pension reform to succeed.
Following the reform method conflicts over the income replacement rate are another challenge. The insurance rate is how much of the monthly income is paid to the national pension, and the income replacement rate is the amount of pension returned in old age based on the collected pension. Currently, the National Pension has a "9 percent insurance rate-40 percent income replacement rate system" in which if people pay 9 percent of their monthly income for 40 years when they work, they receive 40 percent of their income after their retirement. However, in 2055, when the fund is depleted, people will have to pay 29.8 percent of their monthly income to get the 40 percent income replacement rate.3) This means that the previous generation only had to pay 9 percent to receive pension benefits with the same income replacement rate, but after 2055, the future generation will have to pay more than three times the current insurance rate. In order to solve this problem, it is suggested to lower the income replacement rate. If the income replacement rate decreases, the depletion of the national pension fund will slow, so the insurance rate does not rise sharply immediately. In this case, the young generation will receive a smaller pension amount than the amount paid. Some experts who are participating in the private advisory committee argue that the income replacement rate should be raised to 45 or 50 percent to restore trust in the national pension system. This is because the purpose of the system is not to save money, but to focus on guaranteeing retirement life. When the income replacement rate is increased, pension receipts will be much higher, which can reduce the poverty rate for the elderly. From a long-term point of view, the current generation of young people will also benefit from higher pension receipts.
Although opinions on the income replacement rate and insurance rate are mixed, it seems certain that future generations will be burdened with pension more than the current generation. Due to the aging society and low birth rates, it has become difficult for all generations to receive pension fairly. The current generation has no choice but to bear the double burden of having to pay the insurance rate for their old age while supporting the older generation. The current aging rate is only about 17.5 percent, but the aging rate in 2050 is expected to be 40 percent, about 2.3 times higher than the current level.4) Thus, in the case of the future generation, it will be more difficult to find a balance because the younger generation will be responsible for the pension of more elderly people. If pension reform is attempted, the current generation will have to pay more than the older generation because the insurance rate will increase. This creates a dilemma in which future generations also have to continue to pay a lot of money to boost the current generation. Regarding the situation in Korea, OECD pension expert Andrew Reilly said, "Korea's poverty rate of the elderly is the highest among OECD countries, so the government and the national pension need to inform the public of the financial status information."5) As generational equity is collapsing due to different population ratios than in the past, it is necessary to take a new direction before the pension fund is exhausted.
What can be learned from precedent?
As discussion on pension reform progresses, interest in the precedent of pension reform in foreign countries is increasing. In France, which has recently introduced controversial pension reform, large-scale protests are being held against President Macron's legislation. French citizens were angered by the rise in pension age and Macron's use of Paragraph 3 of Article 49 of the French Constitution to pass the pension reform bill. Usually, the legislative process involves the government proposing a bill to congress and then being passed by the National Assembly. However, this system is considered anti-democratic by some French people, as the government can legislate on its own. According to Macron's reforms, France's pension age has increased from 62 to 64. Expecting strong opposition, he used the constitution to pass the bill which provoked public anger. The reason why people are sensitive to the rise in pension age is because of their life values. France spends around 14.5% of its economic output on pensions. This suggests that France has better welfare for old age than other countries by investing more economic production in pensions than other countries. The French are bound to be sensitive to pension age because they think pension is a benefit to those that have contributed to society. Korea is also considering extending the pension age due to the depletion of funds, and citizens are currently protesting.
Unlike France, where pension reform is not progressing well, Germany succeeded in reforming early on and is also pursuing additional reforms. This suggests that pension reform is a chronic problem for the country. They introduced the first public pension system in the world and faced pension depletion in the early 2000s due to aging and low birth rates. In order to maintain the income replacement rate of 55 percent in the 1990s, future generations had to pay twice as much as previous ones. To solve this problem, the German government introduced the Riester pension through the Hartz reform. It is a system in which the government supports 30 to 90 percent of the payment when subscribers pay 4 percent of their annual income. It is a method of paying insurance rates in proportion to the income of subscribers, but government subsidies are provided for low-income families. Pension reform, which seemed to have been completed successfully, has also been threatened with sustainability due to the accelerated aging rate and COVID-19, raising the need for further reform. Reflecting the longer average life expectancy, the pension age was delayed from 65 to 67 years old, and there is also a movement to expand the budget by changing the Riester Pension, which was optional, into mandatory subscription. Since Germany has been praised for its gradual reform by revising the pension law 11 times, there has been constant discussion that Korea should follow Germany's reform method. However, Yu Hoseon, a researcher at the National Pension Institute, said, "In the case of Germany, the public pension system started early and the salary level was high, so they were able to carry out reforms. However, Korea's national pension system was introduced in 1988 and has not matured yet."6) Unlike Germany, where pensions were established early and had high returns, Korea does not have a high return on pensions, so if Korea blindly follows the German method, unexpected problems may occur.
As the cases of the two countries differ from those of Korea, the government is paying attention to the precedent of pension reform in Japan, where the elderly poverty rate is similar to Korea. The Japanese pension consists of a basic pension for all citizens and a welfare pension for office workers. In 2004, Japan's pension reform raised the welfare pension insurance rate to 18.3 percent, more than double that of Korea, and the basic pension insurance rate to 24 percent. Although Japanese opposition was so strong that the ruling party, which led the reform, suffered a crushing defeat in the Upper House election, it was evaluated as an exceptional outcome from a long-term perspective. Though, as a result of the 2019 pension verification, the need for reform has resurfaced as it is analyzed that future generation pension payments will plunge by more than 20 percent due to rapid aging. Currently, a plan to extend the payment period of the basic pension insurance rate is being discussed as the government has decided not to raise the welfare pension insurance rate anymore. The pension system payment was previously paid up to 60 years old but now it will be 65 years old, and the age of receiving pension has been postponed to 75. More elderly people are being forced to work because they cannot receive pension with more than half of those between the ages of 65 and 69 reported to be still working. Japan's pension reform is meaningful for preventing financial collapse, but the institutional goal of supporting old age has failed. Therefore, if Korea dramatically raises insurance rates by focusing on financial collapse like Japan, public opposition is inevitable. There are differences in the attitude of various countries' citizens to accept pension reform, but friction between citizens and the government about reform is common among all. It seems that Korea needs to make an effort to find the best way to solve the current situation by analyzing overseas pension reform cases.
To change a crisis into a new opportunity
Discussion on pension reform constantly arises with each government change, but pension reform has failed frequently. The collapse of equity between generations brought about by an aging society is accelerating pension depletion. At a time when voices on pension reform are mixed, in order for the pension reform crisis to be an opportunity, it seems that a new reform plan must be drawn up based on communication with the public.
1) Jo Hyejin, "Although the Poverty Rate of the Elderly Has Decreased to 30%...People Over 85 Get Higher", KBS NEWS, January 22, 2023
2) Han Gyeongyeon, "Through Structural Reform, We Must Create a National Pension That Future Generations Can Receive", Korea Economic Research Institute, July 7, 2022
3) Jeon Hyewon, "Income Replacement Rate or Financial Stability, What Is the Solution to Pension Reform?", SisaIN, March 9, 2023
4) Kim Hyerim, "'73 Years Old'... What Is the Retirement Age of 60 if the Standard Age of the Elderly Is Raised?", IMSN, September 28, 2022
5) Yu Wonjung, "How to Address 'Senior Poverty and Generational Inequality'? OECD "National Pension Should Be Reorganized as Soon as Possible."", KBS NEWS, January 5, 2023
6) Seo Hangi, "The Government Is Going to Reform the National Pension System... What Did Advanced Countries Do?", YONHAP NEWS AGENCY, August 29, 2022