Weighing pension payouts

When national pension payments became fully available, an increasing number of recipients began choosing to take pension plans that offer payouts earlier than the eligible age. The purpose of the scheme is to help seniors who have not yet met the age of requirement for payments and need financial help.

Currently, the national pension offers a payout to recipients from age 61. However, individuals can choose to collect their pension as early as age 56.

In 2008, 150,000 people signed up for the early pension plan, about 7 percent of the nation’s total pension recipients. But by June 2014, early retirement beneficiaries grew to 420,000, 14 percent of the total. The rising number illustrates the financial instability of senior citizens.

In principle, the early pension plan serves its original function faithfully. But it is difficult to unconditionally welcome the increasing trend of electing to access the pension prematurely.

The biggest problem with the scheme is that less money is given to recipients. Currently, the early old-age pension plan offers a payment amounting to 6 percent less for every year the recipient opts to receive the pension earlier than age 61.

If a person chooses to receive the pension from age 56, for example, he or she would get 70 percent of the amount payable at age 61. It is only fair that they receive less, because they will be paid longer. But for the entire period when they receive a pension, the early plan provides considerably less money in total.

For example, if Mr. A applied for a regular pension plan at age 61, he would receive about 1.11 million won ($1,046) per month. But if he chose to receive it two-and-a-half years earlier, from age 59, he would receive 890,000 won a month, or 15 percent less. If he lived to age 81.4, the total payment for the early pension would be 236.74 million won, while the total from the regular plan would be 271.82 million won. The early old-age pension plan offers 35.08 million won less in total.

Ultimately, the early pension plan means less money in the long run, although it can be an immediate relief for the first few years. As senior citizens grow older, other sources of income tend to diminish, and they become more dependent on their pension. For people over age 70, receiving a larger pension payment becomes more meaningful. Expansion of the early pension plan, therefore, is hardly desirable for stability.

The authorities need to prevent the early pension plan from becoming too popular. Putting tighter controls on early collection requirements is a must. Currently, those aged 56 or older who have been making payments to the pension plan for more than 10 years can apply for early collection when their monthly income is under 1.93 million won.

The conditions are considerably more generous compared to plans in other countries in terms of age, membership period and income requirement. New conditions are needed, such as pushing the age limit to 58 years old with a 20-year membership and a monthly income that is under the minimum cost of living.

But restricting the early old-age pension plan will not solve the problem entirely. According to a survey by the National Pension Service in 2012, 68 percent of early old-age pensioners applied for premature payments knowing they would receive less in total.

Many Korean workers - particularly those aged between 51 and 59 - go through a so-called “income crevasse” period of earning nothing and receiving no pension. The authorities should consider a scheme to extend the unemployment payment period from eight months to 18 months for workers over age 55. A comprehensive overhaul of the welfare system to fill in the income cavity is necessary.

Moreover, the National Pension Service needs to introduce a partial pension plan, where recipients receive about 50 percent of the pension if they choose to start it earlier than the general eligibility age. Then, pensions will still be paid out, but an excessive reduction of total payments can be prevented. Early pension recipients who cannot join the scheme while still working will also be able to receive the pension this way, benefiting from increased payments.

Lastly, recipients need to be more prudent when signing up for the early pension. According to the National Pension Service’s 2012 survey, 20 percent responded that they applied for the early pension plan because they thought it would be more advantageous. Many of them simply don’t have a clear understanding of the system. Stability during senior years cannot be guaranteed by the state alone. Recipients need to apply for early pension payments based on accurate information. Better lives for seniors can be attained when the country provides a thorough social safety net and individuals use it wisely.

Translation by the Korea JoongAng Daily staff JoongAng Ilbo, Oct. 2. Page 37

*The author is a professor of sociology at Korea University.

by Kim Won-seob