[Op-Ed] The National Pension Needs Structural Reform Beyond Age-Based Differentiation

Differentiating Pension Premiums by Generation Is Only a Short-Term Measure; It Does Not Resolve the System’s Structural Defects

Insurance should serve its proper function, but the uniform system makes it operate like a tax.

The uniform contribution system should be reformed and shifted in a direction that respects individual choice.

The government recently proposed a plan to differentiate the pace of National Pension premium increases by generation. However, this approach has the problem of failing to fundamentally resolve the financial depletion of the National Pension. Differentiating premiums by generation is only a short-term measure and will not fundamentally fix the system’s structural defects.

The National Pension’s financial shortfall stems from the structural instability of the system itself. The current National Pension system adopts a uniform premium rate. Although applying a single premium rate may appear fair, the actual premiums paid differ greatly depending on income.

As of 2024, the National Pension premium rate is uniformly set at 9%, but because higher-income earners bear higher premiums, it effectively operates as a differentiated contribution system. However, because the pension benefits paid back are applied equally to everyone, those with higher incomes receive relatively less in benefits compared to the premiums they have paid.

Even if premiums are differentiated by generation, the problem of a uniform premium rate that does not take individual characteristics into account within the same generation still remains. Even within the same generation, a 9% premium rate still means a higher premium burden for higher-income individuals, while the problem of receiving uniform pension benefits in the future remains unresolved.

The National Pension should originally function as insurance. However, the current uniform contribution method effectively makes the National Pension operate like a tax. If the National Pension were structured more like a private pension, guaranteeing benefits in proportion to what each person contributed, people would participate in the pension system more actively.

Forcing the same premium rate on each generation, as is done now, while calculating benefits uniformly, will only spread distrust and resistance toward the pension system. In the long run, this will undermine confidence in the National Pension system.

The National Pension system should move in a direction that considers intergenerational equity while also respecting individuals’ freedom to choose their pension arrangements. For example, a system could be established to reform the National Pension so that, like auto insurance, people receive benefits in proportion to what they have paid.

Such an approach would help people plan their own financial responsibilities autonomously while also reducing excessive government intervention. The National Pension should also be reformed so that individual accounts can be established and operated according to each person’s chosen autonomous method.

At the government level, there is also a way to actively encourage enrollment in private pensions. The government should pursue policies that induce people to actively subscribe to private pension plans. In Germany’s case, the government recognized the limitations of the public pension system and devised measures to actively encourage enrollment in private pensions.

Korea should likewise promote participation in private pensions through similar policies and gradually reduce the scale of the current National Pension by lowering dependence on it. In this way, alongside downsizing the National Pension, the overall pension system could be operated on the basis of private pensions.

The uniform contribution system should be reformed, and the National Pension system should be transformed in a direction that respects individual choice. The introduction of individual accounts and the active encouragement of private pension enrollment are the keys to reforming the pension structure.

Yunju Kim, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 국민연금, 세대별 차등화 넘어선 구조개혁 필요하다

Author: Yun-ju Kim

Date: 2025-01-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=27262