PUBLIC PENSION SYSTEMS AND THE ELDERLY POVERTY IN KOREA Hyeok Chang Kwon (GNTECH) The Joint World Conference on Social Work, Education and Social Development 2016. COEX, Seoul Korea 28 June 2016
Today s talk Background: Elderly Poverty Korean Public Pension System The Effects of Public Pension on the Elderly Poverty Discussion : policy implications
Background Korea Shows the highest poverty rate of people aged 65 and over among the OECD countries The elderly poverty rate was 48.1% in 2013-3.3 times higher than the national average The world s most rapidly ageing country The old-age income security system has not been well developed to chase the fast ageing History of public pension in Korea 1988 National Pension Scheme (NPS) two major reforms undertaken (1998 and 2007) 2007 Basic Old Age Pension (social assistance), transformed into Basic Pension in July 2014
Proportion of population aged 65 and over 50.0 Korea 40.0 37.4 40.1 32.3 30.0 24.3 20.0 10.0 2.9 3.1 3.8 5.1 5.9 7.2 9.1 11.0 13.1 15.7 19.9 -
Overview on the old-age income security system in Korea The public old-age income security system in Korea Basic Livelihood Security Scheme (general social assistance) Basic Pension National Pension Scheme Three other public occupational pension schemes
Uniqueness of the Korean pension system The history of Korean pension is relatively short, thus Korea has dual developmental tasks - the maturation of pension policy (expansion of pension coverage) and the rationalization of the pension system (pension reforms) Finance of the NPS - the partially funded system Korea has a massive pension fund and a high elderly poverty rate at the same time The size of the National Pension Fund (NPF) is ranked the third in the world and expected to increase for nearly 30 years in the future
Korean public pension system Korean public pension system mainly consists of the partially funded social insurance model (the NPS) and the social assistance model (Basic Pension). If social insurance types of pension schemes can be categorized as the Beveridgean type (a flat-rate benefit type) and the Bismarckian type, the Korean pension scheme (the NPS) belongs to the Bismarckian type, which provides earning-related benefits.
National Pension Scheme (NPS) The NPS covers the entire workforce aged between 18 and 59 such as employees, the self-employed, farmers, and fishermen. The number of insured persons of the NPS has increased fivefold after 26 years of its introduction. However, the real coverage rate, which means the rate of the active participation in the NPS, is quite low
The insured persons of the NPS 1) Workplace-based Insured Persons; 2) Individually Insured Persons; 3) Voluntarily Insured Persons; 4) Voluntarily and Continuously Insured Persons If Workplace-based or Individually Insured Persons (excluding Voluntarily Insured Persons) cannot pay contributions because of bankruptcy, large drops in income, unemployment etc. the NPS gives them exemption from contribution payment. Since 1988 when the NPS was introduced, the number of Workplace-based Insured Persons has shown an increasing trend, while the number of Individually Insured Persons is gradually decreasing.
Coverage of insured persons There is a big difference between the coverage rate and active contribution rate. In June 2014, 96.4% of the working population aged between 18 and 59 is covered by public pension. However, the share of those contributing to the public pension schemes is 65.4% of the workforce. 67.6% of the total population aged between 18 and 59 is covered by public pension, and the share of those contributing to public pension is only 50.3%. Many people are categorized as economically inactive, and it is difficult to keep track of the income of some of the economically active population (e.g. selfemployed people, temporary or atypical workers etc.) and to impose contributions on them.
Insured persons of public pension in Korea. June 2014 Economically inactive population: 9,853 Total population aged 18 to 59: 32,972 (100.0%) Population ineligible for public pension: 822 Economically active population: 23,119 Population eligible for public pension: 22,297 Population eligible for NPS: 20,860 Insured persons exempted from contribution payments: 4,649 Potential contributors: 16,211 Defaulters over 1 year: 1,072 (Unit: thousand persons) Insured persons paying contribution: 15,139 Public occupational pension: 1,437 29.9% 2.5% 14.1% 3.2% 45.9% 4.4% Subtotal: 16,396 (49.7%) Subtotal: 16,576 (50.3%)
Coverage of beneficiaries Those in receipt of benefits from public pension schemes accounted for 37.6% of the elderly aged 65 and over in 2013 (33.7% for NPS and 3.9% for public occupational pension). The proportion of old-age pension beneficiaries as a share of the elderly population in countries with mature public pension schemes including Germany, the UK, the US, Canada (Old Age Security), Australia, Sweden and Japan (National Pension) are over 90% The NPS solely could not resolve the poverty problem of the current elderly and a new old-age income protection system was needed, and this was connected to the introduction of the Basic Pension in 2014.
Benefits of the NPS The benefit of the NPS consists of two parts - one is the flat-rate and the other is the earnings-related. The level of benefit is generally proportionate to the insured period and earnings. Benefits provided: Old-age Pension, Survivor Pension, Disability Pension, Lump-sum Refund, Disability Lump-sum Compensation and Death Grant The replacement rate (40 yrs contribution) is scheduled to slowly decrease into 40% by 2028. However, the Korean National Assembly is currently debating on increasing the replacement rate of the NPS into 50% in the process of reforming the Government Employees Pension.
Adequacy 1 The benefit level of the NPS is quite low: the average monthly payment of Old-Age Pension was 323 thousand won (using PPPs, $375) in 2013, while the Minimum Cost of Living was 572 thousand won This is because of the short history of the NPS 46% of the total NPS beneficiaries and 56% of the total Old-Age Pension beneficiaries are receiving Special Old-Age Pension, designed for insured persons during the initial period of the NPS which can receive after only five qualifying years The average monthly payment of Special Old-Age Pension was about 200 thousand won
Adequacy 2 The average benefit level of the NPS is supposed to be continuously increasing as the NPS is being mature. But the scheme is currently playing a limited role in reducing the elderly poverty Public pension replacement rate in Korea is 39.6%, which is similar with the OECD average of 40.6%. However, the average contribution period of current beneficiaries is short - 14.7 years in 2013. This is far below than that in other European countries, which means Korea has a relatively short history of the NPS.
Seniority at retirement of new flows of retirees total. 2010 Seniority (contribution years) at retirement Country Total Men Women Greece 25.1 27.5 20.8 Spain 37.6 39.9 31.3 Italy 30.7 33.9 27.1 Sweden 37 40 34 UK 35 42 26 Korea 14.7 16.6 11.7
Basic Pension A non-contributory pension scheme to supplement old-age income Coverage: around 70 per cent of the elderly aged 65 and over a very high coverage compared to 24 per cent for safety-net pensions in the OECD countries (OECD, 2016). Benefit: 10 per cent of the flat-rate part of the NPS benefit and 6.2 per cent of the average wage
NPS & the Elderly Poverty Reseacher Kim (2008) Kang (2011) Jang (2013) Result Pre-post design Elderly poverty reduction of public pensions are respectively 2.87% in 1996 and 11.58% in 2006. Simulation study In the future, poverty reduction effects of the NPS appears 3.6%p ~ 9.0%p for each generations. Difference-in-difference Model National pension had no effect on elderly poverty.
Basic Pension & the Elderly Poverty The benefit of the Basic Pension is decided in the consideration of the NPS flat-rate benefit, which is associated with contribution period. The introduction of the Basic Pension in 2014 reduced the relative poverty rate (50 per cent of the median income) of the elderly to 44 per cent from 48 per cent (MOHW, 2016).
Discussion : Do Public Pensions Reduce the Elderly Poverty? No. Why? The Effects of Public Pension on the Elderly Poverty - NPS: no effect or small effect. However, in the future, the effects will be significant. - Basic Pension: small effects, due to large coverage but small amount of benefit Coverage of NPS - Half of the population aged between 18 and 59 is excluded from public pension and are left in the dead zone. - This coverage gap in Korea is distinctive, compared to high-income OECD countries. Adequacy of NPS benefit - Korea s public pension replacement rate is 39.6% (OECD average; 40%) - However, due to the short average insured period, the real pension benefit level is very low.
Theoretical and policy implications Due to immature pension schemes, most Asian counties have high elderly poverty problems in common. Policy option for Basic Pension: reducing the coverage and increasing the benefit Policy option for NPS: coverage issue needs to be considered; the expansion of credit The Korean case shows that public pension policies seek the balance between the adequacy of pension benefits and the financial sustainability of pension schemes, in addition to trying to solve the pension coverage issues.
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