Pension Reform? It’s Right to Cut Away the Rot

It appears that discussions on pension reform are once again taking place in the National Assembly. According to news reports, the ruling and opposition parties are sparring over how to handle parametric reform in pension reform—adjustments to the contribution rate and the income replacement rate. A total of nine parametric reform bills have been introduced by both sides in the National Assembly, and all of them include raising the contribution rate—the amount people pay in—from the current 9% to 13%. So, on this point, there is effectively no disagreement between the two parties.

At the same time, the ruling and opposition parties do differ over the income replacement rate, and they are arguing over whether a special committee should be formed to discuss this issue together with other related matters, or whether it can be handled by the National Assembly Health and Welfare Committee. Although they are bickering over their differences, the gap is hardly a striking one. What they are actually fighting over is whether to raise the current income replacement rate from 40% to 42%, or to 44% (or 45%).

Whatever the outcome, if reform takes this form, it would be embarrassing to call it “reform.” Whether the current 40% income replacement rate is raised to 42% or 44%, it will do little to change the fact that the pension is little more than “allowance-level pension money.” Moreover, a reform that raises the contribution rate from 9% to 13% while simultaneously increasing the payout level from 40% to 42% or 44% does nothing at all to solve the problem of fund depletion. It merely pushes it back slightly.

As many pension experts have pointed out, our pension system was flawed from the very beginning. It was originally designed on the basis of “paying in a little and receiving a lot,” and was therefore born as a system that could never be sustained over the long term. On top of this, demographic problems caused by low birthrates and an aging population have further accelerated the timing of fund depletion. In the end, to prevent the pension fund from running out and to maintain the system, there is no choice but to raise the contribution rate, lower the income replacement rate, or increase the age at which pension benefits begin. But every one of these measures is politically “vote-losing.” That is why politicians, who “live on votes,” cannot help but remain passive about pension reform. Meanwhile, as the problem worsens, they are eventually forced to address it, but as noted above, they stop at makeshift remedies rather than fundamental reform, allowing the wound to fester while merely pushing back the time of explosion little by little. In effect, they are playing a game of “passing the pension bomb.”

One thing that contributes to keeping real reform at bay and limiting responses to patchwork fixes is the logic of “pension sustainability.” In relation to the pension reform discussions now underway in the National Assembly, one media outlet concluded that “the important standard for reform is the permanent survival of the National Pension.” If the task with regard to the National Pension is its “permanent survival,” then the solution would not be difficult to find. It would simply become a matter of keeping it alive permanently, no matter what social cost must be paid. For example, regardless of the fallout, would not the pension system itself “survive permanently” if contribution rates were raised sharply or the shortfall were filled with tax revenue? But this perspective, first, forgets the purpose for which the pension system was introduced and instead places priority on the survival of the system itself; and second, it reveals the problem of acting as though we live in a world without scarcity, even though resource scarcity governs the real world. This kind of “pension sustainability” argument should not even be on the table.

As most people know, so long as the current structure of “paying less and getting more” remains in place, every pension reform will be nothing more than “pouring water into a bottomless jar.” A few years from now, pension reform will inevitably become an issue again. What we need is not a patchwork remedy, but a fundamental cure.

Broadly speaking, there are two reform options to consider. One is that, if the pension system is to be maintained, it must move away from the current model of “paying less and receiving more” and instead become a system of “receiving according to what one has paid in.” That is the only way to eliminate the chronic problem of fund depletion. The other is to abolish the pension system itself and integrate old-age income security into the National Basic Living Security Act. After all, the average monthly National Pension benefit currently amounts to only about 600,000 won, whereas the amount paid under the basic living security system is said to currently exceed 700,000 won for a one-person household at maximum. If that would improve old-age income security, there is no reason it should be a problem. And there are countries that have successfully reformed their systems in this direction.

A pension under the current structure is already rotten flesh. It has been so since the moment of conception. Rotten flesh should be cut away. Otherwise, it will cause even healthy flesh to rot. Rotten flesh must be removed so that new flesh can grow. That is what reform is.

Hyukchul Kwon (Director, Free Market Institute)

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Original title: 연금 개혁? 썩은 살은 도려내는 것이 옳다

Author: Hyeok-cheol Kwon

Date: 2025-02-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=1&idx=27320