South Korea’s National Pension System: coverage gaps and gaming
As populations are aging across the globe due to dropping birth rates and rising life expectancy, governments are faced with new challenges when it comes to their mostly outdated thinking about retirement and the elderly. South Korea’s situation is especially alarming, as it has one of the most rapidly aging population in the world.
Demographics of South Korea
According to the latest projections, by 2040, 32.3% of the population in Korea will be 65 years and older and it is aging faster than any country in history. The elderly share of the population doubled from 7% to 14% in just 18 years, which took other countries such as France 115 years to reach, the United States 71 years and even Japan, which is notorious for its rapidly aging population, 24 years to reach.
Contrary to neighboring China, which is also aging rapidly, South Korea is already a high-income country, with a majority of the population used to middle-class living standards. Yet, in comparison to nearby Japan, South Korea has to face the issues of an aging population while in the middle of modernization. The dramatic changes in the population composition will put enormous pressure on businesses, government budgets and slow the country’s economic growth.
In the past, South Korea had the challenge to raise itself from being an impoverished agrarian society, to becoming a well-established economic power and managed to do so with great success. Now, the next challenge for South Korea will be to take on its aging population, which is every little bit as great as the previous one.
The task ahead will certainly not be without efforts. However, those who are familiar with the country will know that the Land of the Morning Calm will be more than capable of accomplishing it.
Now, some of the main issues with South Korea’s National Pension System are as follows:
- Financial instability and inadequate size of accumulative funds. The funds are projected to be depleted in 2060 and no plan is set in place for the period after depletion.
- Precarious management of the national pension fund with concern to policy directions of fund operations, appropriate assets allocation in domestic and foreign markets, stocks, bonds and other investments.
- Under the current contribution-benefit system, present generations receive greater benefits in relation to their contribution. The burden of this gain will have to be carried by the other generations to come.
- A general sense of unfairness between generations and income levels.
- Immature and lacking income security system – although the different schemes in the system are competitive, on various points they are quite contradictory.
Paving the way for the future
Given its current state, reforming the pension system is a must and it can be accomplished through initiatives such as:
- Setting up a short term and long term blueprint for the income security systems, by firstly explicitly defining the minimum and adequate standards of the income security.
- Implementing measures to enhance the pension system’s sustainability.
- Setting clear financial goals to make the pension system’s future more predictable.
- Forecasting and monitoring future total public pension expenditures, in relation to the GDP.
- Restructuring the income security system, to be more efficient and effective in the future.
- Improving equity between generations through an increase in the contribution rate.
- Setting up a plan and procedures to deal with shocks from the differences between present and the to-be-reformed system.
It is important for South Korea to organize the National Pension System in such a way that the different pillars do not contradict each other, but instead complement each other.
In addition to the reforms to the pension system, the government should also focus its attention on measures that will help change the society’s traditional understanding of social roles and push for employer pension systems, to help take pressure off of public retirement systems and family support networks.