I pay 450,000 won a month for national pension and receive 158,000 won…’I’ll get less than I paid’

Deficit turnaround in 2041 – 26.1% contribution rate for future generations after fund depletion in 2055

This is the timetable for the national pension that we were given this year, the year of the quadrennial recalculation.

The National Pension, introduced in 1988 to provide for the nation’s elderly, started out as a ‘time-bound’ pension that was scheduled to be depleted someday. Therefore, for 35 years, discussions on ‘pension reform’ have been ongoing regardless of the government, and while several reforms have been made, they have failed to solve the fundamental problem.

In 2023, when South Korea’s fertility rate has fallen to an unprecedented 0.7 births per capita, pension reform has become a national issue that can no longer be put off. Ahead of the unveiling of the Yoon administration’s pension reform plan, scheduled for October this year, we are running a long-term series, “Digging into Pension Reform,” that examines the problems with South Korea’s pension system and explores alternatives.

Photo by Yonhap

Under the current national pension system, if the premium rate is increased by more than 13 percent, high-income earners will receive less pension than the premiums they pay. This is because the national pension system is designed to ensure that high earners receive less than they pay in order to redistribute income, and this is the ‘threshold’ for pension reform. In order to create a sustainable national pension without losing high-income earners, it is pointed out that structural reforms are needed to convert the national pension into an income-proportional pension that “receives more than it pays” along with an increase in the insurance premium rate.

According to the Ministry of Health and Welfare and pension experts on the 19th, when the national pension insurance premium rate is raised to 13 percent, the profit ratio for high earners earning twice the average income of members falls below 1. The benefit ratio is an indicator of how much pension benefits you receive compared to the premiums you pay. It is calculated by dividing the present value of total premiums by the present value of total benefits. Assume 40 years of contributions and 20 years of benefits. A benefit ratio less than 1 means that you receive less pension than you paid in premiums.

Currently, all members of the national pension system have a benefit ratio greater than 1, regardless of the size of their income. The situation changes if the premium rate increases. Since benefits do not change as premiums increase, the benefit ratio falls, and for high earners, the benefit ratio falls below 1 if the premium rate increases to 13%. High earners actually lose money. The analysis also shows that the point at which the profitability ratio falls to 1 is pushed back to when the premium rate increases to 15%, given that people live longer. This is because the longer you live, the more pension you get.

“The premium rate threshold of 13% at which the profitability ratio for high earners falls below 1 is calculated based on the average life expectancy of 82.7 years in 2018, and if we assume that the average life expectancy will increase to 90 years in 2050, the profitability ratio for high earners will fall below 1 when the premium rate rises to 15%,” said Kim Yong-ha, a professor at Sunchon Hyang University who serves as a private adviser to the National Assembly’s special committee on pension reform.

Elderly people spend time at Topgol Park in Jongno-gu, Seoul, on Aug. 18./Photo: Hankyung DB

This threat to the profitability of high-income earners stems from the structure of the national pension, which has an income redistribution function. The amount of national pension benefits is calculated by reflecting the average income of all members (A value) and the average income of the member (B value) in a one-to-one ratio for the three years immediately preceding receipt. Low-income earners pay less in contributions, but have a higher benefit cost because their benefit amount reflects the average income of more members than they earn. Due to this income redistribution function of the A-value, the profit ratio for high-income earners should be lower. According to the Ministry of Welfare, a high-income earner whose B-value is twice the A-value (2.86 million won as of this year) has a profit ratio of 1.4. A low-income earner with a B value of half the A value has a profit ratio of 2.8, which is twice the profit ratio of a high-income earner.

This feature of the national pension is highlighted in the ‘2023 Estimated Pension Monthly Amount Table’ recently released by the Ministry of Welfare. According to this, a person who has been enrolled in the National Pension for 40 years and pays 450,000 won per month in premiums will receive a monthly pension of 1.595 million won. On the other hand, a person who paid 90,000 won per month for the same period will receive 775,860 won per month. This means that even a high-income earner who pays five times more in premiums will only receive twice as much.

The problem is that reforming the exhausted national pension system requires raising the premium rate above a certain level. According to the fifth financial calculation of the National Pension Financial Estimation Expert Committee released in March, in order for the National Pension to maintain a reserve equal to the current year’s pension payments in 70 years, the contribution rate would need to be raised to 17.9% by at least 2025. This means that the current 9% contribution rate would have to double to make the program sustainable. However, even if public resistance is overcome and an increase is agreed upon, the cap will remain at 12% to protect the cost of benefits for high earners.

Experts point out that two structural reforms are needed to remove this “ceiling” and increase the premium rate. The first is to move to an income-proportional pension system메이저놀이터, where the pension payout is reflected in the same proportion as the A value, and the B value is increased to provide a “more for less” pension. This would protect the cost of benefits for higher earners from rising premium rates.

At the same time, there is a need to restructure the basic pension, which is currently provided to the lowest 70% of earners over the age of 65. It is argued that the roles of the two programs should be divided, with the national pension being proportional to income and the basic pension strengthening its income redistribution function by reducing the number of beneficiaries, mainly the poor.

An official from the Ministry of Health and Welfare said, “In order to stabilize the national pension fund’s finances, insurance premiums need to be raised, and to do so, we need to consider the revenue cost issue.” “To solve the revenue cost issue, we need to think about structural reforms that increase proportionality, such as those who pay more insurance premiums receiving more pensions.”

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