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Pension Reform in Korea. 2007.10 Jae Young LEE Director, Welfare Economic Policy Division Economic Policy Bureau Ministry of Finance and Economy Republic of Korea. Contents. 1. Public Pension in Korea(1988-2002) 2. Ageing Population and Pension 2. Recent Public Pension Reform(2003-2007)
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Pension Reform in Korea 2007.10 Jae Young LEE Director, Welfare Economic Policy Division Economic Policy Bureau Ministry of Finance and Economy Republic of Korea
Contents 1. Public Pension in Korea(1988-2002) 2. Ageing Population and Pension 2. Recent Public Pension Reform(2003-2007) 3. Agenda for Future Reform
1. Public Pension in Korea(1988-2002) (1) Establishment of the National Pension Scheme(1988) • Partially-funded system with a redistributive element : Unsustainable low-contribution, high-benefit structure - Benefits : based equally on the average wage in the economy and individual earnings * replacement rate : 70% for an average worker with 40 years of contribution - Contributions : 3% of individual earnings • Coverage : Narrow - limited to regular employees in firms with workers ≥ 10
1. Public Pension in Korea(1988-2002) (2) Reform of National Pension Scheme(1988-2002) • Benefits : down - 1988 : replacement rate of 70% - 1998 : replacement rate of 60% • Contribution : up - 1988 : 3% of individual earnings - 1993 : 6% of individual earnings - 1998 : 9% of individual earnings • Coverage : widened - 1998 : regular employees in firms with workers ≥ 10 - 1992 : regular employees in firms with workers ≥ 5 - 1995 : farmers, fishermen and residents in rural areas - 1999 : urban self-employed persons and all employees
1. Public Pension in Korea(1988-2002) <Figure 1> The coverage of the National Pension Scheme Source: National Pension Service and the Korea National Statistical Office
2. Ageing Population and Pension (1) Population Ageing in Korea • Population of the elderly : (’05) 9.1% → (’50) 38.2% <Figure 2> Prospect of Population Change by Age
2. Ageing Population and Pension • Population Ageing in Korea : one of the World-fastest - Ageing to Super-aged society : only 26 years <Table 1> Population Ageing : Trend and Prospect
2. Ageing Population and Pension (2) Poverty of the Elderly • Severe poverty among households with elderly persons - Relative poverty rate(2000) : households with elderly persons 38.8% >> all households 8.1% * Relative poverty rate : ratio of households with income less than 40 % of the national median income • Ensuring adequate income for the elderly becomes social task - Elderly persons living alone or with spouse : 55% vs. Elderly persons living with one of their children 39% (2005) - Elderly persons receiving public pensions : 14% (2005)
2. Ageing Population and Pension (3) Ageing and Sustainability of the National Pension Scheme • NPS Finance Prospect(2003) - 2036 : expected to turn into deficit - 2047 : expected to be exhausted <Figure 3> NPS Finance Prospect
3. Recent Public Pension Reform(2003-2007) (0) Three Problems • Problem of Financial Un-sustainability - Low-contribution, high-benefit Pension structure - NPS forecast to be exhausted in 2047 - Further parametric reform needed • Problem of the Uncovered Elderly - Elderly persons receiving public pensions : 14% (2005) - Contributors to NPS among working-age population : 39.9% (2006) • Problem of Low Return on Investment by the Pension Fund - Returns on investment of NPS (2004-2006): 6.72% * USA CalPERS 13.4%, Canada CPP 13.87%, Sweden API 12.90%
3. Recent Public Pension Reform(2003-2007) (1) Financial Sustainability : Parametric Reform (2007) • A Parametric Reform bill passed in the Assembly(May 2007) - Replacement rate : 60% -> (08) 50% -> (28) 40% * increase of contribution rate from 9% to 15.9% dropped during legislation <Figure 4> NPS Finance Prospect after Reform
3. Recent Public Pension Reform(2003-2007) (2) Increase of Pension Coverage : Basic Pension (2007) • Coverage - (2008) 60% of the elderly persons (≒ 300 million) - (2009) 70% of the elderly persons (≒ 363 million) • Benefits - (2008) 5% of the average wage (≒ $90) - (2028) 10% of the average wage • Finance : Tax (Central & Local Governments) - (2008) 2.2 trillion won (≒ $2.4 billion) - Central Government 72% + Local Government 28%
3. Recent Public Pension Reform(2003-2007) (3) Reform of Pension Fund Management (A bill to be submitted to the Assembly shortly) • Current System - Government-run, non-professional management structure • Benchmark Pension Fund : Canada CPPIB - Independence from the government, expertise and accountability of the investment board and management, transparency • Main Contents of the Reform Bill - Create an independent pension fund management commission - Set up an professional public pension investment corporation - Establish accountable and transparent governance structure
4. Agenda for Future Reform • Sustainability of the Pension Scheme - Parametric vs. Systemic Reform • Coverage of the Pension Scheme - Extend the Basic Pension? • Pension Fund Management - Divide? Out-source? Privatize?
4. Agenda for Future Reform < A Systemic Reform Proposal by the OECD (2007) > • A Two-Part National Pension Scheme - Basic Pension + scaled-back National Pension • Basic Pension - replacement rate : 20% - cost : 6.8% of GDP (tax-financed) • Scaled-back National Pension - replacement rate : 20% - contribution rate : 6.45% of earnings (3.5% of GDP)
