The math of pension payouts

The Korean national pension system is set to pay out much more than what has been contributed, with those making 10 years of contributions receiving full payment. The retiree would receive nearly double their payment after 21 years. The pension is bound to run out of funds under such a structure. If the premium stays at the current 9 percent, the fund will run out of money by 2057, even if the payout is reduced to 40 percent of the average salary during subscription period from the current 45 percent.

Experts advise that unless the premium goes up, the fund will go bust sooner or later. The Ministry of Health and Welfare has come up with a blueprint to reform the fund, proposing to raise the premium to 15 percent. But the president has ordered a reexamination.

In a parliamentary hearing, Kim Yeon-myung, the new presidential senior secretary on social affairs, said it was impossible to increase the payout ratio without raising the premium. A professor at Chung-Ang University, he argued that a small raise in premiums can push up the payout ratio to cover half of a retiree’s monthly earnings. He also claimed that the fund can be sustained even without substantial reserves by paying out as funds are collected. But Kim said his arguments were based on past data and cannot be applied in current conditions.

Kim’s honest admission as a pension expert should guide pension reform. Without bigger contributions, the fund cannot be sustained. People must pay more if they want a stable return. The pension is for the security of individuals in their later years. It must not be used as a political tool.

JoongAng Ilbo, Nov. 14, Page 30