South Korea’s proposed national pension reform, reportedly aimed at strengthening income stability via a pay-more-receive-more approach, could place a heavier financial burden on future generations, particularly those aged 20 and under and including those yet to be born. Under the proposed plan, the pension deficit is also estimated to increase to more than eight times the estimated deficits under the current system.

Maeil Business Newspaper obtained access to materials outlining the long-term financial outlook for national pension funds under the proposed reform plans that was prepared by a group under the National Assembly’s pension reform special committee tasked with fostering public discussion. According to the materials, two proposals were made: adopt a “pay-more-receive-more” model, with a premium rate of 13 percent and an income replacement rate of 50 percent, or a “pay-more-maintain-benefits” plan with a 12 percent premium and 40 percent income replacement.

Under the first proposal, the cumulative deficit by 2061 could soar to 382 trillion won ($275.8 billion), marking over eight times the expected deficit under the current system, which is projected to hit 47 trillion won in 2055.

The national pension is based on a system where payments are covered by contributions received during the same year as the fund is depleted. Under this structure, those who are teens or younger in 2024 would potentially face a significant burden. By 2061, when the fund is projected to be exhausted, this younger generation would be required to contribute 35.6 percent of premiums that will increase annually to a peak of 43.2 percent in 2078. This means that younger generations will have to contribute 43 percent of their monthly salary to national pension premiums, in stark contrast to the older generation which has been paying only 9 percent since contribution rates rose from 3 percent in 1988 to 6 percent in 1993 and then to 9 percent since 1998.

Even when compared to the average premium rate paid by future generations over their lifetimes, the disparity persists. For instance, a third grader in elementary school born in 2015 would face an average premium rate of 22.2 percent under the first proposal, which is 2 percentage points higher than the 20.2 percent under the current system. But these details were excluded in the final materials.

Under the second proposal, which maintains the same income replacement rate, the rate is marginally reduced by 1.4 percentage points to 18.8 percent. The deficit would increase to 96 trillion won by 2062, when funds are estimated to be depleted, but the premium rate in 2078 would remain at 35.1 percent, the same level as maintaining the current system.

If the pension shortfall is covered by government finances, the ratio of pension expenditure to gross domestic product (GDP) would hit 9.5 percent by 2081, equivalent to the rate under the current system, but would rise to 11.8 percent under the first proposal.

Experts emphasize the importance of providing transparent information to demonstrate the sustainability of pensions, a key factor in driving rational reform. “Given that the older generation is making decisions for future generations, who lack decision-making power for now, we need sufficient information to decide on a reform that everyone will agree on,” Korea Institute for Health and Social Affairs senior researcher Yun Suk-myung said.

Meanwhile, a recent survey indicated widespread distrust among individuals in their 20s and 30s regarding the pension system, who cited concerns about population decline and fund depletion.

According to a survey of 1,152 people aged between their 20s and 30s conducted by the Korean Women‘s Development Institute, 75.6 percent of respondents expressed distrust in the national pension system. Among them, those aged 35 to 39 exhibited the highest level of distrust at 78.8 percent, followed by those aged 30 to 34 (77.9 percent), 25 to 29 (75.8 percent), and 20 to 24 (67.8 percent). The primary concern cited was the forecast for continuous premium increases due to population decline, which was mentioned by 89.3 percent of respondents, followed by fears that funds would be depleted when they hit old age, with 82.6 percent expressing this concern. A whopping 73.3 percent of respondents also felt that their opinions were not adequately reflected in the pension reform plan, and 62.4 percent noted the lack of transparency in fund management.

By Ryu Young-wook and Chang Iou-chung

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]