[Becoming an Insurance Insider] Why Has Pension Savings Drifted Away from Our Attention?

Pension Savings Contribution per Person 2.49 Million KRW in 2018
Tax Benefits Drive Rapid Growth in IRP Market
"Pension Savings Tax Benefits Should Be Raised to 7 Million KRW"

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[Asia Economy Reporter Oh Hyung-gil] Interest in pension savings, a representative retirement preparation product, is fading as the amount of contributions decreases. This phenomenon does not align with the era of 'disease-free longevity,' where aging is becoming severe and retirement preparation is urgent.

Pension savings are financial products where money is deposited into an account for more than five years and then received as a pension after the age of 55. Pension savings require receiving the pension form for more than 10 years and, along with retirement pensions, are considered representative means of securing retirement income.

According to the Financial Supervisory Service, the pension savings reserves at the end of last year were 135.2 trillion KRW, an increase of 4.9% from the previous year. The growth rate of reserves, which had maintained around 9% until 2017, fell below 5%.

More than half of the subscribers receive a monthly pension of 160,000 KRW or less, and only 2% receive more than 1 million KRW monthly.

According to the report "Pension Savings Market Slump and Implications" released by the Korea Insurance Research Institute, the contribution ratio to income for pension savings was 0.9% in 2008, rose to 1.3% in 2012, but then continuously declined to 0.8% in 2018.

The average contribution per person for pension savings remains in the 2 million KRW range, lower than the tax deduction limit of 4 million KRW, and the contribution amount decreased from 2.66 million KRW in 2013 to 2.49 million KRW in 2018.

The continuous decline in the contribution ratio for pension savings is partly due to changes in tax benefits, and the substitution effect caused by the expansion of a similar product, the Individual Retirement Pension (IRP) market, is identified as the main cause.

The report explained, "In 2014, the tax benefit for pension savings changed from income deduction to tax credit. Despite the relatively increased benefits for low-income groups, their contribution ratio decreased, leading to an overall decline in the contribution ratio. In 2015, additional tax benefits up to 3 million KRW were granted for IRP on top of the 4 million KRW tax credit limit for pension savings, causing the IRP market to grow rapidly."

Because of this, there are criticisms that pension savings have limitations in choice due to lower tax benefit limits compared to IRP.

Kim Se-jung, a research fellow at the Korea Insurance Research Institute, said, "To receive a tax benefit of 7 million KRW, one must additionally subscribe to IRP, whereas IRP alone can provide tax benefits up to 7 million KRW. Pension savings do not provide tax benefits for contributions exceeding 4 million KRW."

He proposed that, for the balanced development of the retirement security system, the tax benefit limit for pension savings should be expanded to 7 million KRW, the same level as IRP, in the long term.

Researcher Kim added, "Since pension savings have a high sales proportion in the insurance sector and have the advantage of allowing long-term pension receipt like lifetime pensions, it would be desirable from the perspective of institutional balance to allow free mixing with IRP. It is necessary to raise tax benefits to resolve the selection constraints between pension savings and IRP."

This content was produced with the assistance of AI translation services.