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Article | Global News Briefs

South Korea: Proposed pension system reforms include a substantial increase in contributions

By Chongson An | December 30, 2024

South Korea’s government proposes the first hike in 27 years in the pension contribution rate for both employers and employees to slow the country’s projected pension fund depletion.
Retirement|Health and Benefits|Ukupne nagrade
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Employer Action Code: Monitor

The Ministry of Health and Welfare (MHW) has published a Pension Reform Promotion Plan to reform the social security pension system (National Pension Scheme – NPS), for Parliament’s consideration. The most significant proposal is an increase in the combined employer/employee pension contribution rate, which has not been changed in 27 years. The plan’s measures are intended to improve the NPS’s long-term sustainability and strengthen pensioners’ income security. Currently, the country’s pension fund is projected to be depleted by 2056 (despite it being one of the world’s largest, with 1,147 trillion South Korean wons in assets). In addition, South Korea has the highest elderly poverty rate among OECD countries, with more than 40% of the population over age 65 falling below the poverty line (2023 OECD data). The reforms also revive the proposal to mandate that all employers provide a funded retirement plan.

Key details

Following are the main measures included in the reform plan:

  • The total pension contribution rate would increase from 9% to 13% of income (which would remain evenly divided between the employer and employee), to be phased in through annual rate increases starting in 2025 based on employee age as follows: 1.0 percentage point increases for employees age 50 or older, 0.5 percentage point increases for ages 40 to 49, 0.33 percentage point increases for ages 30 to 39 and 0.25 percentage point increases for ages 20 to 29. The increases would continue until the 13% rate is attained (2028 for the oldest group, 2040 for the youngest).
  • A new automatic stabilization mechanism would adjust pensions in payment depending on inflation, life expectancy and the number of new contributors in the previous three years (pensions in payment are currently only adjusted for inflation).
  • The target pre-retirement income replacement rate for the social security pension would increase from 40% to 42%, improving retirement security for future pensioners.
  • The NPS would aim to increase its long-term average annual investment return from 4.5% to 5.5% or higher, by diversifying its investments and increasing its exposure to higher yield assets, such as international and alternative investments.
  • Compulsory participation in social security would be extended from age 59 to age 64, and the current childbirth credit system (under which mothers on leave from work are eligible for up to 50 months’ credit toward their retirement pension, depending on the number of children) would be expanded. This would include providing credits for the first child onward (rather than from the second child) and eliminating the 50 month cap.
  • The mandatory employer provision of an Employee Retirement Benefit Security Act (ERBSA) funded retirement plan would be phased in, combined with new incentives for small and midsize employers and new restrictions on in-service withdrawals of savings to preserve retirement funds. Currently, only newly established companies are required to provide an ERBSA funded retirement plan, and members can access up to their full balance for reasons such as buying property, expenses due to hospitalization of six months or more, and court ordered bankruptcy .The establishment of an ERBSA plan would meet the existing end of service benefit obligations.

Employer implications

The proposed reforms already faced significant challenges for approval from the opposition-controlled National Assembly before the recent attempt of President Yoon to establish martial law. Unpopular reforms promoted by an unpopular government do not bode well for the proposals, to say the least. That said, the MHW developed the reforms after consultations with various stakeholders with the intent to address a variety of widely recognized issues with the pension system. The proposals therefore can be an indication of reforms to come.

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Head of Retirement, South Korea

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