Pension reform after 18 years: What must follow?

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Pension reform after 18 years: What must follow?

Published: 21 Mar. 2025, 00:00

Audio report: written by reporters, read by AI

Conservative People Power Party floor leader Kweon Seong-dong, left, National Assembly Speaker Woo Won-shik, center, and liberal Democratic Party floor leader Park Chan-dae hold documents listing agreed provisions for the National Pension Act at the National Assembly in western Seoul on March 20. [NEWS1]

On Thursday, Korea's National Assembly passed an amendment to the National Pension Act, introducing a phased increase in both the contribution rate and the income replacement rate. This marks the first pension reform in 18 years since 2007 and the first increase in the contribution rate in 28 years, set to take effect next year. The bipartisan effort to pass this reform, despite intense political divisions exacerbated by martial law controversies and the presidential impeachment trial, deserves recognition. It is imperative that both parties continue to prioritize national interests over political discord.

To ensure the financial stability of the National Pension Service and reduce the burden on future generations, the ideal approach would have been a "pay more, receive less" model. However, the adopted plan follows a "pay more, receive more" framework. The contribution rate, currently at 9 percent, will rise by 0.5 percentage points annually over the next eight years, reaching 13 percent. Meanwhile, the income replacement rate, which was set to decrease from 41.5 percent this year to 40 percent by 2028, will instead be adjusted to 43 percent starting next year. Additional measures include extending the recognition period for contributions during childbirth and military service, enhancing premium support for low-income groups, and incorporating a government guarantee for pension payments into the law.

However, this parametric reform is merely the beginning. The current measures only delay the depletion of pension funds by approximately nine years. Structural reform is essential to ensure the long-term sustainability of the National Pension Service. To this end, the National Assembly has established a special committee on pension reform to discuss and agree on fundamental structural changes.

Critics argue that the increase in the income replacement rate disproportionately benefits those nearing retirement — generations that have historically contributed less while receiving more. Continuous monitoring is necessary to ensure that the reform’s outcomes are equitably distributed across generations. Instilling confidence in younger and future contributors is crucial so they, too, believe they will receive their rightful pensions.

People are seen inside the office of the National Pension Service in Seodaemun District, western Seoul on March 20. [NEWS1]

Given the sensitivity of issues like contribution rates and income replacement rates, reaching consensus is never easy. For this reason, many advanced nations have adopted automatic adjustment mechanisms, which align these rates with economic conditions and demographic changes. However, measures to mitigate the impact of reduced pensions must also be considered. Additionally, discussions must address the division of roles between the basic pension and the national pension, reforms to other occupational pensions such as the Civil Servant Pension, and improvements to private pension systems like retirement pensions.

When pursuing structural reform, it is crucial to set clear goals and deadlines to avoid superficial efforts. The special committee has set the end of the year as its deadline, with the possibility of extensions if necessary. Crafting a well-defined roadmap for achieving structural reform is vital. Furthermore, efforts to reflect public opinion and raise awareness about the necessity of pension reform must go hand in hand. Without genuine structural changes, Korea risks merely postponing an inevitable crisis rather than securing the financial stability of its pension system for generations to come.

Translated using generative AI and edited by Korea JoongAng Daily staff.