[Chatham House Roundtable] Limits of Population Reform... Need to Explore Switching to Defined Contribution (DC) System

Annual Pay-As-You-Go Method
Future Generations Face Burden Challenges
Switch to DC Type... New Account Management
"Must Persuade That You Get What You Pay"
Low Realism in Raising Fund Returns
Discuss After Precise Figures Are Derived

Editor's Note

On the 12th, a Chatham House roundtable was held at the Asia Media Tower in Seoul under the theme "How Should National Pension Reform Proceed?" Chatham House is the nickname for the Royal Institute of International Affairs (RIIA), a top-tier research institution in the field of diplomacy and security based in the UK. The roundtable was attended by Nam Jae-woo, Head of Fund and Pension at the Korea Capital Market Institute; Yang Jun-mo, Professor of Economics at Yonsei University; Oh Gun-ho, Policy Chairman of the Welfare State We Make; Lee Kang-gu, Research Fellow at KDI’s Fiscal and Social Policy Research Department; and Yang Jun-mo, Professor of Economics at Yonsei University (in alphabetical order).

◆ Moderator = Kim Pil-su, Managing Editor of Economic Finance at Asia Economy

On the 12th, at the Asia Economy conference room in Jung-gu, Seoul, the 'Asia Economy Chatham House' was held. From the left clockwise: Oh Geon-ho, Policy Committee Chairman of the Welfare State We Make; Lee Kang-gu, Research Fellow of the Fiscal and Social Policy Research Department at KDI; Nam Jae-woo, Head of Fund Pension at the Capital Market Research Institute; Yang Jun-mo, Professor of Economics at Yonsei University. Photo by Yoon Dong-joo doso7@

National pension reform is a national agenda. We have reached a point of no return. Why is it so urgent?

According to this year's 5th actuarial valuation, the pension fund depletion point is projected to be 2055. Even if the current system is maintained after fund depletion, by 2080, pension expenditures will account for 9% of GDP, while revenues will be only 2% of GDP. This results in a deficit of about 7% of GDP. Calculated with this year's GDP, that amounts to approximately 160 to 170 trillion won. We need to find ways to ensure the sustainability of the pension. Ultimately, this will mean increasing the burden on the public.

Pension reform is essential to provide contributors with confidence that the system is stable. There must be a predictable plan regarding how much they will be required to contribute. The pension system is a 70-year promise: 40 years of contributions and 30 years of benefits. Changing the plan every five years is unacceptable.

Do you think switching to a pay-as-you-go system after fund depletion is unrealistic? (※‘Pay-as-you-go’ means collecting the necessary insurance premiums annually from contributors to continue pension payments after the National Pension Fund is depleted in 2055. Currently, the National Pension operates on a funded system, where premiums collected from contributors are accumulated in a fund to pay benefits to recipients such as the elderly.)

Switching to a pay-as-you-go system would be difficult for future generations to bear. This year, pension benefit expenditures are 39.521 trillion won, but by 2080, they are expected to reach 889.877 trillion won, accounting for 9.4% of GDP. While other countries maintain pay-as-you-go systems, their revenue structures must also be considered. The core issue in Korea is the lack of a sustainable revenue structure.

The system has already become one that only imposes burdens. If switched to pay-as-you-go, future generations will have no reason to enroll.

The Pension Actuarial Valuation Committee presented 18 scenarios last August, which received much criticism. How do you evaluate them?

Given the shrinking future generations, these scenarios are neither mathematically feasible nor morally fair. The indiscriminate combination of these into scenarios is, frankly, an unprofessional approach by experts.

The 18 scenarios are combinations of three factors: premium rate increases, delayed pension eligibility age, and improved target returns. Adjusting these parameters is called ‘parametric reform,’ but parametric reform alone cannot produce a sustainable pension reform plan. If the sustainability target is only extended to 2093, parametric reform might suffice, but beyond that, further parametric reforms will be necessary. There is also significant opposition to premium rate increases, and the scenarios lack a methodology for achieving consensus on this issue.

Presenting 18 scenarios cannot be seen as having provided alternatives. It is more like giving up on proposing alternatives. If raising the income replacement rate were included, the number of scenarios would increase further.

This is a key question: among the proposed scenarios, which do you prefer?

Among the options, I think a 15% premium increase could be politically acceptable to citizens. Currently, the rate is 9%, so a gradual increase to 15% is persuadable. After that, discussions should naturally progress from parametric reform to structural reform.

None of the 18 scenarios from the Actuarial Valuation Committee are acceptable alternatives. Experts say that pension reform should consider sustainability, intergenerational equity, and adequacy of benefits. However, it is practically difficult to satisfy all three simultaneously. The most important is securing sustainability. While premium rate increases are being discussed for sustainability, it is difficult to convince younger generations with parametric reform alone. Structural reform toward a defined contribution (DC) pension is necessary. Contributors must be persuaded that they will receive benefits proportional to their contributions to be willing to pay higher premiums and ensure sustainability. Who would pay premiums if they do not receive benefits proportional to their contributions? From 2024, reforms should shift to a DC model, managing the funds accumulated so far as the old pension account and premiums collected after the increase as the new pension account. Any shortfall in the old pension account should be covered by general government finances.

Changing the National Pension to an income-proportional DC type is the only long-term solution to prevent a decline in the replacement rate. Other countries introduced such systems after their funds were depleted. Korea’s fund is not yet exhausted. Early reform can prevent the replacement rate from falling below 1. Parametric reform alone is insufficient. Achieving fiscal stability through parametric reform does not solve everything. Strengthening the link between individual contributions and benefits is necessary.

With ongoing population aging and decline, an immediate switch to DC would inevitably cause a sharp drop in benefit rates, effectively removing public pension guarantees. An immediate switch to DC is unrealistic. First, some parametric reforms should be implemented, which will raise premium rates, and then a transition to DC can be considered.

Public pensions are based on intergenerational support, but sustainability requires equity as the most important criterion. We must create a plan that future generations, not yet born, can agree with and find satisfactory. All 18 scenarios proposed by the Actuarial Valuation Committee fail in terms of intergenerational equity. Premium rates should be increased, and the government should inject finances to prevent fund depletion and avoid a full pay-as-you-go system. This approach satisfies intergenerational equity. Government financial support is necessary because the government is responsible for the fund’s insufficient returns caused by population decline.

On the 12th, participants are sharing their opinions at the 'Asia Economy Chatham House' held in the Asia Economy conference room in Jung-gu, Seoul. Clockwise from the left: Yang Jun-mo, Professor of Economics at Yonsei University; Nam Jae-woo, Head of Fund and Pension at the Capital Market Research Institute; Oh Gun-ho, Policy Chairman of the Welfare State I Make; Lee Kang-gu, Research Fellow at the Fiscal and Social Policy Research Department of KDI. Photo by Yoon Dong-joo doso7@

Last August, the Actuarial Valuation Committee excluded options to raise the income replacement rate. (※The day after the roundtable, on the 13th, the final plan included raising the income replacement rate from the current 40% to 45% and 50%.)

Personally, I strongly oppose raising the current income replacement rate. It would undermine fiscal stability and worsen intergenerational equity. Including raising the income replacement rate in parametric reform discussions is inappropriate. Parametric reforms should proceed separately, and adequacy of benefits for old-age income security should be discussed during structural reform.

The maximum amount one can use over a lifetime is about 30% of their economic activity income, which is the concept of permanent income. The current income replacement rate should be based on permanent income. Raising the current replacement rate would require higher premiums and increase fiscal burdens.

Increasing premium rates or delaying pension eligibility age are issues society can agree on. However, increasing fund returns is an uncontrollable variable. Is it realistic to assume raising fund returns from 4.5% to 5.0% or 5.5%?

The Actuarial Valuation Committee proposed raising pension investment returns, but it is unrealistic. No matter how skilled fund managers are, they are subject to overall market conditions. Focusing solely on higher returns would force a stock-heavy portfolio, increasing risk. Assuming the fund can achieve target returns as desired is risky.

Many countries operate funds with a target return concept to ensure system stability and sustainability. Korea has nearly 1,000 trillion won in funds, which should be maintained to cover a portion of benefits. For example, the Canada Pension Plan targets 60% of future benefits to be paid by future contributions and 40% by partially funded assets. They calculated the fund size and required returns precisely to set target returns. Korea only presents a rough target return without clear goals. Returns should be set top-down. If the premium rate rises to 15%, the required fund return to maintain partial funding should be specified to enable meaningful discussion.

Besides parametric reform, there are discussions about introducing an automatic adjustment mechanism (which automatically reduces pension payments in response to increased life expectancy and decreased birth rates) and extending retirement age. What are your views?

Applying an automatic adjustment mechanism broadly is too extensive. Inflation adjustment is already applied, and linking life expectancy and benefits might be considered, but this should be seen as a supplement for healthy individuals. It does not apply to the National Pension. Introducing automatic adjustment amid public concern over fund depletion would cause a sharp drop in benefits. It is unrealistic in Korea. Extending retirement age is controversial. While meaningful for old-age measures, including it in pension reform would complicate discussions with other value debates. Also, stable jobs benefiting from extension are limited. We should consider ways to increase economic participation rates among those aged 60 and above.

I share Panelist A’s views on the automatic adjustment mechanism. Regarding retirement age extension, we should distinguish between the practical and legal concepts. Korea’s legal retirement age is uncommon globally and not closely related to actual retirement age. Many work beyond 60. It is a formal concept. Therefore, the legal retirement age of 60 is not an obstacle to raising pension eligibility age to 68.

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