Pension Reform in Korea

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Pension Reform in Korea

• 2007.10
• Jae Young LEE
• Director, Welfare Economic Policy Division
• Economic Policy Bureau
• Ministry of Finance and Economy
• Republic of Korea

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Contents

• 1. Public Pension in Korea(1988-2002)
• 2. Ageing Population and Pension
• 2. Recent Public Pension Reform(2003-2007)
• 3. Agenda for Future Reform

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1. Public Pension in Korea(1988-2002)

• (1) Establishment of the National Pension
  Scheme(1988)
• Partially-funded system with a redistributive
  element
• Unsustainable low-contribution,
  high-benefit structure
• - Benefits based equally on the average wage
  in the economy and individual earnings
• replacement rate 70 for an average
  worker with 40 years of contribution
• - Contributions 3 of individual earnings
• Coverage Narrow
• - limited to regular employees in firms with
  workers 10

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1. Public Pension in Korea(1988-2002)

• (2) Reform of National Pension Scheme(1988-2002)
• Benefits down
• - 1988 replacement rate of 70
• - 1998 replacement rate of 60
• Contribution up
• - 1988 3 of individual earnings
• - 1993 6 of individual earnings
• - 1998 9 of individual earnings
• Coverage widened
• - 1998 regular employees in firms with
  workers 10
• - 1992 regular employees in firms with
  workers 5
• - 1995 farmers, fishermen and residents in
  rural areas
• - 1999 urban self-employed persons and all
  employees

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1. Public Pension in Korea(1988-2002)

• ltFigure 1gt The coverage of the National
  Pension Scheme

Source National Pension Service and the Korea
National Statistical Office
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2. Ageing Population and Pension

• (1) Population Ageing in Korea
• Population of the elderly (05) 9.1 ? (50)
  38.2
• ltFigure 2gt Prospect of Population Change by
  Age

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2. Ageing Population and Pension

• Population Ageing in Korea one of the
  World-fastest
• - Ageing to Super-aged society only 26 years
• ltTable 1gt Population Ageing Trend and
  Prospect

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2. Ageing Population and Pension

• (2) Poverty of the Elderly
• Severe poverty among households with elderly
  persons
• - Relative poverty rate(2000)
• households with elderly persons 38.8 gtgt
  all households 8.1
• Relative poverty rate ratio of
  households with income less than 40 of the
  national median income
• Ensuring adequate income for the elderly becomes
  social task
• - Elderly persons living alone or with spouse
  55
• vs. Elderly persons living with one of
  their children 39 (2005)
• - Elderly persons receiving public pensions
  14 (2005)

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2. Ageing Population and Pension

• (3) Ageing and Sustainability of the National
  Pension Scheme
• NPS Finance Prospect(2003)
• - 2036 expected to turn into deficit
• - 2047 expected to be exhausted
• ltFigure 3gt NPS Finance Prospect

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3. Recent Public Pension Reform(2003-2007)

• (0) Three Problems
• Problem of Financial Un-sustainability
• - Low-contribution, high-benefit Pension
  structure
• - NPS forecast to be exhausted in 2047
• - Further parametric reform needed
• Problem of the Uncovered Elderly
• - Elderly persons receiving public pensions
  14 (2005)
• - Contributors to NPS among working-age
  population 39.9 (2006)
• Problem of Low Return on Investment by the
  Pension Fund
• - Returns on investment of NPS (2004-2006)
  6.72
• USA CalPERS 13.4, Canada CPP 13.87,
  Sweden API 12.90

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3. Recent Public Pension Reform(2003-2007)

• (1) Financial Sustainability Parametric Reform
  (2007)
• A Parametric Reform bill passed in the
  Assembly(May 2007)
• - Replacement rate 60 -gt (08) 50 -gt (28)
  40
• increase of contribution rate from 9 to
  15.9 dropped during legislation
• ltFigure 4gt NPS Finance Prospect
  after Reform

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3. Recent Public Pension Reform(2003-2007)

• (2) Increase of Pension Coverage Basic Pension
  (2007)
• Coverage
• - (2008) 60 of the elderly persons (? 300
  million)
• - (2009) 70 of the elderly persons (? 363
  million)
• Benefits
• - (2008) 5 of the average wage (? 90)
• - (2028) 10 of the average wage
• Finance Tax (Central Local Governments)
• - (2008) 2.2 trillion won (? 2.4 billion)
• - Central Government 72 Local Government
  28

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3. Recent Public Pension Reform(2003-2007)

• (3) Reform of Pension Fund Management
• (A bill to be submitted to the Assembly
  shortly)
• Current System
• - Government-run, non-professional management
  structure
• Benchmark Pension Fund Canada CPPIB
• - Independence from the government, expertise
  and accountability of the investment board and
  management, transparency
• Main Contents of the Reform Bill
• - Create an independent pension fund
  management commission
• - Set up an professional public pension
  investment corporation
• - Establish accountable and transparent
  governance structure

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4. Agenda for Future Reform

• Sustainability of the Pension Scheme
• - Parametric vs. Systemic Reform
• Coverage of the Pension Scheme
• - Extend the Basic Pension?
• Pension Fund Management
• - Divide? Out-source? Privatize?

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4. Agenda for Future Reform

• lt A Systemic Reform Proposal by the OECD (2007) gt
• A Two-Part National Pension Scheme
• - Basic Pension scaled-back National Pension
  
• Basic Pension
• - replacement rate 20
• - cost 6.8 of GDP (tax-financed)
• Scaled-back National Pension
• - replacement rate 20
• - contribution rate 6.45 of earnings (3.5
  of GDP)