Financial Challenge of the pension system in the republic of Korea

Transcription

1 한국보건사회연구원 Financial Challenge of the pension system in the republic of Korea Jung, Hae Sik(Social Policy Research Department)

2 -First Reform of National Pension -Background: 1) The pension scheme had raised doubts about its long term sustainability since its introduction. The expected financial model of National Pension scheme is PAYG system at the time of its introduction. The imbalance between generous benefits and low contribution rates purposed to raising scheme compliance. 2) Scheduled extension of national pension in urban areas in It had raised the issue of pension compliance with declared income level. 3) The main purpose of reform is to resolve the imbalance between benefits and contribution. But, it also purposed to expand pension coverage to urban area without a serious resistance. -Three Main changes for financial sustainability: -1) the replacement rate was reduced from 70%(with average earnings and 40 qualifying years) to 60% -2) the pensionable age was raised from 60 to 65 during , every 5 years -3) the financial review system was introduced to project the long-term finance of the national pension and suggest measures for improving the system every five years. * Option for raising contribution rate from 9% to 12.65% gradually from 2010 to 2025, did not introduced at that time.

3 -Second Reform of National Pension in Background 1) The first actuarial projection in 2003 showed that a pension deficit occur by 2036, and the pension fund would be exhausted by 2047(Before the first pension reform, the year of depletion of pension fund is 2031). 2) National Pension Development Committee(NPDC) which performed actuarial projection made three reform proposal. All of them included the raising of contribution rate. 3) Based on the proposal of NPDC, the government proposed the bill for pension reform. The bill composed an increase of the contribution rate and a reduction of the benefits level. 4) Another bill was proposed by opposition party, which made pension scheme to dual tier by introducing basic pension. -Two Main changes: -1) the introduction of basic old age pension scheme with 70% of coverage in 65+ ages and 5% of benefits level(a-value of the national pension) -2) the benefits level reduced from 60% to 50% in Thereafter, replacement rate would drop from 50% to 40% between 2009 and 2028(dropping by 0.5%pt per every year)

4 Year Replacement rate Contribution rate Pension Calculation Formula 1988~ % Employment_based 2.4(A+0.75B)(1+0.05n) : 3%(1988~1992) : 6%(1993~1997) : 9%(1998~) Residence_based : 3%(1995~2000.6) : 4~9%(2005.7) 1999~ % Employment_based 1.8(A+B)(1+0.05n) : 9%(1998~) Residence_based : 4~9%(2005.7) % 9% 1.5(A+B)(1+0.05n) % 9% 1.2(A+B)(1+0.05n) In year 2014 : Replacement rate 47.0%, : pension formula 1.41(A+B)(1+0.05n)

5 -As a result of second pension reform, the depletion year of the national pension fund was extended from 2047 to The depletion year of pension fund was 2031 before the first pension reform. - Although reducing of benefits level from 70% to 40% and extending of pensionable age from 60 to 65, the doubt of long-term financial sustainability of national pension did not diminish. -The third actuarial projection results showed that the expenditures will exceed the contribution income starting in 2031, and the expenditure will exceed the total income(contribution income + investment return of pension fund) in 2044, and the pension fund exhaust in All the time of reform, the long-term financial instability is the main issue of reform. As a result, the confidence of pensioners on government was damaged. -During the two pension reform process, the issue of increasing contribution rate was always brought up. But it did not introduce. -Contribution rate required for accomplishing for the financial goals which targeted to 2 funded/expenditure ratio by 2083 is 12.91%(results from 3 rd Actuarial projection).

6 -In Korea, rapid population ageing will make old-age income security more important. -People who did not have enough resource to secure old-age life standard was 48.6%(OECD, 2011). - Population ageing combining with expanding life expectancy and low fertility ratio could undermine the system sustainability. -During two times of national pension reform, the huge benefits cuts eventually reduce its role as old age income security. -Increasing old-age dependency ratio make difficult to select a option for expanding national pension benefits. -The role of Basic Old Age Pension would be more important to people with low(or not having) national pension benefits.

7 thousand 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ~ old-age dependency ratio Source: National Statistical Office(2010), Population Projection.

8 Source: The result of third actuarial projection 2013.

9 (After) rd actuarial projection nd actuarial projection st actuarial projection Source: Actuarial projection report(2003, 2008, 2013).

10 rd actuarial projection Male 2 nd actuarial projection st actuarial projection rd actuarial projection Female 2 nd actuarial projection st actuarial projection Source: Actuarial projection report(2003, 2008, 2013).

11 Income Expenditure Year Accumulated fund Accumulated fund/gdp Total income Contribution income Investment i ncome Total expenditure Total expen diture/gdp Pension payment Balance Accumulation rate , ,217 32,135 20,082 14, ,032 37, , ,098 54,073 55,025 33, ,487 75, ,732, ,913 95,041 91,872 89, ,176 96, ,494, , , , , ,563 44, ,561, , , , , ,963 10, ,558, , , , , ,076-2, ,541, , , , , ,324-17, ,200, , , , , , , , , , , , , , , , , , , , ,263, ,257, , , , ,388, ,381, ,595 - Source: The result of third actuarial projection 2013.

12 Total contributory income Benefit expenditure Rate of pay-as-you-go system cost GDP Ratio of total contrib utory income to GDP ,460 14, ,344, ,113 17, ,531, ,961 33, ,155, ,118,105 89, ,624, ,658, , ,257, ,368, , ,215, ,067, , ,583, ,171, , ,326, ,568,678 1,257, ,135, ,046,878 1,381, ,512, Source: The result of third actuarial projection 2013.

13 Target Fund to expenditure ratio of 2 Target Fund to expenditure ratio of 5 No occurrence of loss in balance Maintain a stable target fund to expenditure ratio Required contribution rate 12.91% 13.48% 14.11% 15.85% Source: The result of third actuarial projection 2013.

14 -Population ageing combining with expanding life expectancy and low fertility ratio could undermine the system sustainability. -During two times of national pension reform, the huge benefits cuts eventually reduce its role as old age income security. -Increasing old-age dependency ratio make difficult to select a option for expanding national pension benefits. -The role of Basic Old Age Pension would be more important to people with low(or not having) national pension benefits.

15 Current Basic Old Age Pension The bill of New Basic Pension year N of 65+ ('1000) N of Entitlement ('1000) GDP (billion Won) benefits rate (% of A-value) total Exp. (billion Won) % of GDP Total Exp (1,000 billion Won) % of GDP ,624 4,637 1,531, , ,864 4, , ,119 4, , ,396 5, , ,716 5, , ,084 5,659 2,155, , ,691 8,884 3,624, , ,501 11,551 5,257, , ,991 12,594 7,215, , ,622 12,335 9,583, , Source: Kim, Y-H(2013). The context and developmental direction of basic pension bill.

16 National Pension (A) Current BOAP (B) New Bill Basic Pension (C) sum(a+b) sum(a+c) Source: The Actuarial Projection Committee(2013). Kim, Y-H(2013). The context and developmental direction of basic pension bill.

17 -There was a little room for increasing contribution rate. But set aside the possibility of increasing, - In the increased contribution rate, pension fund are growing more rapidly and largely. - The management problem of pension fund would be a matter of grave concern. - The pension expenditure level as % of GDP should be reconsidered. Is it too large? -Total expenditure of two pension scheme is (just) a 9.65 or 9.28 % of GDP in The other option should be considered. -Multi-tier system of old age income security. -Other parametric reform option.

18 Old-age Benefits Expenditure 900, , , , , , , , ,000 0 Pension Reserve 4,000,000 2,000, ,000,000-4,000,000-6,000,000-8,000,000-10,000,000-12,000,000 old-age benefits expenditure(current raw) Pension Reserve(current law) old-age benefits expenditure(non-reflection) Pension Reserve(non-reflection) Notes: The estimation basis was same with second actuarial projection. The Expenditure was just considered as old - age benefits. Source: Kim, Jung and Han(2009). Study on Improving the Plan of Raising the Pension Age in the National Pension Scheme, Social Security Review, 25(1):