'You Get Back What You Pay' Swedish-Style Pension Reform in Focus... Pension Reform Seen Through Overseas Cases

[Y-nomics Must-Know] ②
Switching from DB to DC Plans
Abolishing Universal Basic Pension... Introducing Minimum Income Guarantee for Vulnerable Groups
Automatic Premium Rate Increase Aligned with Pension Finances
Japan Also Reforms Pensions to 'Pay More, Receive Less' Structure

[Asia Economy Sejong=Reporter Kwon Haeyoung] The first countries to face the pension fund depletion crisis due to low birth rates and aging populations were Nordic countries such as Sweden, Finland, and Denmark. Among them, Sweden is regarded as the country that has most successfully carried out pension reform. Sweden, which introduced the world's first public pension system applicable to all citizens in 1913, implemented pension reform in 1998.

The core of Sweden's pension reform was a shift from a "pay less, receive more" structure to a "receive according to what you pay" structure. Previously, pensions were paid regardless of the insurance premiums paid by the subscriber, but after the reform, pensions were paid based on the lifetime premiums paid by the subscriber plus interest. This changed the system from a defined benefit (DB) type to a defined contribution (DC) type. The longer one works, the more pension one can receive, which also had the effect of discouraging early retirement.

To protect vulnerable groups whose retirement income might decrease due to this pension reform, Sweden introduced a minimum income guarantee system. The universally operated basic pension system was abolished, and a guaranteed pension was introduced only for low-income groups. The funding was raised through taxes rather than pension funds, completely separating pension policy from welfare policy, which had been unclear until then, thereby enhancing the sustainability of pension finances.

Sweden's automatic pension finance stabilization mechanism, introduced in 1999, is also noteworthy. This mechanism automatically raises insurance premium rates and lowers pension amounts according to the pension financial balance. In other words, if pension finances deteriorate, the pension payments are reduced. Sweden first activated this mechanism in 2010 after the global financial crisis and operated it twice more in 2011 and 2014. Subsequently, countries such as Germany and Japan benchmarked Sweden and introduced automatic pension finance stabilization mechanisms in 2004.

Japan, which entered a super-aged society earlier than Korea, also provides a reference case for pension reform. The core idea is "pay more, receive less."

Japan gradually raised the employee pension insurance premium rate from 13.58% in 2004 to 18.3% by 2017, and lowered the income replacement rate from 59.2% to 50.2%. Additionally, referring to Sweden's example, Japan introduced the "macroeconomic slide," an automatic pension finance adjustment mechanism. It suppresses pension amount increases by reflecting population decline and increased average life expectancy. Through this, Japan aims to achieve pension finance goals such as a 1.0 funding ratio in 100 years (a financial state capable of paying one year's pension without government contributions), maintaining insurance premium rates below the upper limit, and keeping the income replacement rate above the lower limit.

Besides these, many countries are promoting measures such as raising insurance premium rates, reducing income replacement rates, and increasing pension eligibility ages to overcome the pension finance depletion crisis. According to the Korea Institute for Health and Social Affairs, Germany reduced its income replacement rate to 53% through pension reform in 2001, the UK gradually raised the pension eligibility age from 65 to 68 through reform in 2007, and Australia raised the corporate retirement pension insurance premium rate from 9% to 9.5% in 2014, with plans to further increase it to 12% by 2025.

Professor Kang Sungjin of Korea University’s Department of Economics said, "The depletion problem of the National Pension Fund is due to changes in population structure," adding, "Ultimately, subscribers have no choice but to pay more pension contributions and the government must provide support." He emphasized, "The issue of National Pension reform must be pursued long-term through dialogue with the public."

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