This review provides policy recommendations on how to improve the Korean pension system, building on the OECD’s best practices in pension design. It details the key features of the Korean pension system and identifies its strengths and weaknesses based on cross-country comparisons. The Korean pension system consists of a mandatory pay-as-you-go public scheme, occupational schemes and voluntary individual schemes. The review also covers the first layer of old-age social protection in Korea. This review is the eighth in the series of OECD Reviews of Pension Systems.
OECD Reviews of Pension Systems: Korea
Abstract
Executive Summary
This review provides a detailed analysis of the different components of the Korean pension system, which consists of public pensions, occupational pensions and voluntary individual schemes. It assesses the system according to the OECD best practices and guidelines, and draws on international experiences to make recommendations for improvement.
Korea has made tremendous progress towards improving social security in old age over the last decades, but the pension system has not reached maturity yet. The introduction of the National Pension Scheme (NPS) in 1988 was a major achievement. The initial values of pension parameters raised the income prospects of the first cohorts of NPS retirees well beyond what their contributions could have financed. This also means that these parameter values could not be maintained over time, and substantial reforms have been implemented to improve long-term financial sustainability. Major reforms included: higher contribution rates, lower benefit promises and higher retirement ages. Moreover, the 1998 reform of the management of the National Pension Fund (NPF) led to significant upgrades in its governance and financial investment policy. Overall, the assessment of NPS income and financial prospects is backed by solid analyses conducted in regular actuarial reviews. Furthermore, the introduction of safety-net pensions since 2007 has provided small benefits to the most needy.
Despite significant progress, much more needs to be done. The current defined benefit system generates low pension levels, leading to significant income vulnerability in old age. One severe difficulty arises from the exceptionally fast demographic changes facing Korea, which implies that even these low future pension levels cannot be financed in a sustainable way without further important reforms. This means that Korea has to tackle the formidable joint challenge of raising pension levels while enhancing pension finances. As both contribution levels and coverage rates are low, and the pension system remains fragmented, there is a number of reform options to make the Korean pension system better fit for purpose, raising old-age social protection in a sustainable way.
This review focuses on pension policies to improve contributory pensions, with two implications. Even though contributory pensions interact with the means-tested basic pension component, this review does not include recommendations to improve old-age safety nets. In addition, the effectiveness of some of the proposed policy measures would be enhanced by labour market changes, primarily related to the practice of enforced retirement before the statutory retirement age, itself closely related to seniority-wage practices. Yet, labour market reforms are not within the remit of this review.
Korea also has an occupational benefit system, where employers have to either provide a severance pay plan or a retirement pension plan to their employees, and voluntary personal pension schemes that complement the mandatory public National Pension Scheme. Ensuring greater reliance on complementary pension schemes is a good way to boost incomes from the public system and diversify sources of retirement income. However, to better serve this complementary role, the take‑up of the schemes should be improved. This can be achieved by increasing the use of retirement pension plans in the workplace, making private pension schemes more financially attractive, and improving public understanding about saving for retirement.
Recommendations to improve public contributory pensions
Increase NPS contribution rates considerably and as soon as possible. Use additional resources to increase accrual rates in a financially sustainable way and to preserve at least a small reserve fund
Extend the contribution period after age 60 such that pension entitlements continue to accrue until at least the statutory retirement age
Ensure a gradual convergence of pension rules covering different occupations towards a full integration of all schemes
Raise the wage ceiling to contributions substantially
Finance some pension redistributive components from the state budget
Ensure active participation in the pension system of all eligible individuals, by improving co‑ordination with tax authorities to verify income levels for the individually insured and increasing penalties for employers who do not enrol their workers
Link the retirement age to life expectancy, reduce the current 5‑year gap between the early and the statutory retirement ages and consider moving faster to age 65
Fully permit combining work and pension receipt from the statutory retirement age by removing the earnings ceiling beyond which pensions are reduced
Extend the duration of both unemployment and childcare credits and include the first child in the latter
Main recommendations to improve funded private pensions
Fully transition from severance pay schemes to retirement pension plans
Limit exemptions to occupational pension plan coverage
Boost tax incentives and introduce non-tax financial incentives
Simplify the pension tax system
Lift investment restrictions and encourage more suitable investment strategies
Restrict permitted cases of early withdrawal
Encourage people to purchase annuity products to protect them against longevity risks
Increase the age of access to private pension plans to align it to the retirement age of the public system
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