February 13, 2025
Seoul – The ruling and opposition party fought a nerve-wracking battle on reforming South Korea's national pension system after sharing the view that first dealt with contributions and income substitution rates.
Rep. Kwon Young-Se, the interim leader of the ruling BJP, proposed last week that those rates will be determined as soon as possible. Rep. Lee Jae-Myung, chairman of South Korea's major opposition Democratic Party, directed his party to complete legislation related to this month's rate reform.
The remarks of power have sparked hope for parliamentary discussions, reinstating long-term pension reforms, but as their parties clash again, expectations have lost momentum, largely about who should lead the discussion. The People's Power Party demanded a special pension committee, while the Democrats believed that the Standing Committee, the Health and Welfare Committee should handle the matter.
After a rough agreement, discussions on national pension reform have stalled, increasing the contribution rate from the current 9% to 13%, and income replacement rate from the current 42% to 43% or 44%.
Typically, employees are part of the donation to the National Pension Fund and their employer bears half of the donation. After retirement, retired workers will receive a certain percentage of their previous income, called the “income replacement rate” as pension.
At the last meeting of the National Assembly, the parties were on the brink of the final agreement on both tax rates, but their negotiations stopped at the last minute, when the ruling party demanded that structural reform be included in the discussion.
Both sides agreed to increase the contribution rate to 13%, but differed in the extent to which revenue substitution rates were increased. The ruling party's position is that current interest rates should be maintained or at least increased for as long as possible, while the opposition party demands interest rates to be raised. Their differences have narrowed to 43% and 44% income substitution rates.
If the parties reached a final agreement this time, the national pension system would be reformed in part – the first time in 27 years since 1998.
The number of people insured by the National Elderly Services Administration is steadily decreasing. According to NPS, the number of people covered by the program includes pensioners, and as of late October last year, the number of individuals and voluntary people was 21.81 million, down more than 570,000 from the end of 2023.
During the same 10-month period, the number of insured employees decreased by about 80,000 to 14.73 million. This is the first time this number has fallen. Last April, the National Pension Institute predicted a number that will fall this year, but that number was a year earlier than expected.
While the number of NPS shrinks increased by more than 413,000 in 10 months, it has increased by more than 413,000 in late October.
The organization predicts that if the current trend continues, the total amount of pension payments will exceed the contributions starting in 2027 from 2027, the fund will deficit in 2041 and will run out in 2056.
Although it was difficult to determine interest rates first, rival parties managed to reach an agreement. They must maintain their consent.
If they want to postpone the expected exhaustion of the national pension fund for about 30 years, then first reform rates are reasonable and then continue to discuss structural reform issues such as adjusting age payments at the end of or end of donations, deciding whether to apply differently by age group contribution rate and whether other state-owned pension plans are integrated. Structural reforms are necessary, but take longer to generate the agreement.
Pension reform is a national task that cannot be delayed even for a second. At least the rate of contribution and income substitution must be reformed first in order to quickly delay fund exhaustion. If they missed this opportunity, pension reform could become more difficult later on.
