February 13, 2025
SEOUL – The ruling and opposition parties are waging a war of nerves over reforming South Korea’s national pension system after sharing the view to deal first with contribution and income replacement rates.
Rep. Kwon Young-se, interim leader of the ruling People Power Party, proposed last week to determine these rates as soon as possible. Rep. Lee Jae-myung, chair of the main opposition Democratic Party of Korea, had instructed his party last month to finish up legislation related to the reform of the rates this month.
Kwon’s remarks raised hopes of parliamentary discussion resuming on long-stalled pension reform but the expectations lost steam as their parties clashed again largely over who should lead the discussion. The People Power Party demands the creation of a special pension committee, while the Democratic Party argues that the standing committee, the Health and Welfare Committee, should handle the matter.
Discussion on national pension reform has stalled after sketchy agreements were made to raise the contribution rate from the current 9 percent to 13 percent and the income replacement rate from the current 42 percent to 43 or 44 percent.
Generally, employees contribute part of their wages to the national pension fund, with their employers bearing the cost for half of their contributions. Upon retirement, retired workers then receive a certain percentage of their preretirement income called the “income replacement rate” as their pension.
In the National Assembly’s previous session, the parties got to the brink of final agreements on both rates but their negotiations stopped at the last minute when the ruling party demanded the inclusion of structural reform issues in discussions.
Both parties agreed on raising the contribution rate to 13 percent, but differ on how much to raise the income replacement rate. The ruling party’s position is that the current rate should be maintained for as long as possible or raised minimally, while the opposition party demands that the rate be raised more. Their differences have narrowed to an income replacement rate of 43 percent versus 44 percent.
If the parties reached a final agreement this time, the national pension system would be reformed though partially — for the first time in 27 years, since 1998.
The number of people insured by the National Pension Service is decreasing steadily. According to the NPS, the number of people covered by the scheme including pensioners and those insured individually and voluntarily reached 21.81 million as of late October last year, down more than 570,000 from late in 2023.
The number of employees insured out of obligation decreased about 80,000 to 14.73 million during the same 10-month period. It is the first time that this figure has fallen. In April last year, the National Pension Research Institute forecast the number to drop this year, but the figure fell a year earlier than predicted.
While the number of those insured by the NPS shrank, national pension recipients increased more than 413,000 for the 10 months to 7.23 million in late October.
If the current trend continues, the organization predicted, the total amount of pension payments will exceed that of contributions beginning in 2027, the fund will run a deficit in 2041 and it will be depleted in 2056.
The rival parties managed to agree despite the difficulty of fixing the rates first. They have to keep their agreement alive.
If they want to delay the expected exhaustion of the national pension fund, which is about 30 years away, it would be reasonable to reform the rates first, then move on to discussions of structural reform issues, such as adjusting the ages when contributions end or payments begin, deciding on whether to apply different contribution rates by age group and whether to integrate other state-run pension schemes. Structural reforms are necessary but will take longer to yield agreement.
Pension reform is a national task that cannot be delayed even for a second. At least the contribution and income replacement rates have to be reformed first and quickly to delay fund exhaustion even a bit. If they miss this chance, pension reform could become even more difficult later.