The report from the Korea Institute for Health and Social Affairs (KIHASA) on “Analysis of Life Cycle Pension Assets in Relation to Aging” reveals that the income replacement rate for the National Pension is likely to be over 25%, according to the national policy research institute’s analysis. However, the report highlights that due to the changing demographic structure caused by low birth rates and aging populations, additional resources will be necessary to maintain this level. It emphasizes that pension reform is essential to address fiscal instability.
Specifically, the research suggests that high-income individuals have an expected income replacement rate level around 25%, while low-income individuals could see rates above 40%. Despite the reduction in income replacement rates due to pension reforms affecting those born in the early 1980s, the rates are anticipated to level off to approximately 40% for those born after 2000, due to increased average enrollment periods.
The report also indicates that for low-income groups, even an income replacement rate over 40% may not translate into substantial pension amounts when considering their overall income levels. Therefore, while the National Pension may not fully guarantee old-age income, it is considered a highly profitable retirement investment.
The ongoing issues arising from the trends of low birth rates and aging populations threaten the sustainability of the National Pension’s finances. Researchers warn that without additional funding, future old-age income projections may not be realized, as the current income structure, calculated without fund investment income, suggests an inevitable decline in income replacement rates due to their proportional relation to the elderly dependency ratio.
To resolve the uncertainties surrounding the National Pension, the report suggests reforms focusing on modifying current structural burdens and maximizing fund management returns to alleviate overall fiscal pressure and secure financial sustainability. Given the strengthened fiscal risks observed over the past 15 years since the last pension reform, prompt reform initiatives are deemed necessary. The report underscores that while structural reforms might be ideal, parametric reforms should be pursued first if comprehensive discussions and social consensus on structural changes prove challenging.