3. How to improve the public pension system in Korea

The Korean public pension system consists of three main parts, as described in detail in Chapter 2. First, an old-age safety net, the non-contributory Basic Pension, provides a means-tested benefit to 70% of the population aged 65 and over. Secondly, the contributory National Pension Scheme (NPS) covers private-sector workers. The NPS is a defined benefit scheme based on a strongly redistributive benefit formula, in which accruals consist of two equally weighted components: one is based on the average contribution level of all participants while the other is calculated based on individual contributions. Thirdly, four special regimes cover: civil servants (Government Employees Pension Scheme, GEPS); the military (Military Personnel Pension Scheme, MPPS); workers in private schools (Private School Teachers Pension Scheme, PSTPS): and, Special Post Office workers (Special Post Office Pension Scheme, SPOPS).

The pension entitlements are calculated differently for the NPS and for each of these specific schemes. This chapter compares these entitlements across different earnings levels and career paths. Section 3.2 first analyses the NPS entitlements for private-sector workers with full careers, and examines alternative career paths – early and late retirement, incomplete careers due to childcare and unemployment breaks. It then discusses pension entitlements for the self-employed, as well as the non-contributory basic pension. Section 3.3 analyses the special regimes. Section 3.4 describes the building up of the NPF and the 1998 reform, covers the current and future financial position of the NPS, and shows the required contribution to ensure financial sustainability before highlighting alternative sources of funding. Section 3.5 briefly discusses the finances of the special regimes. Section 3.6 suggests policy options for public pension reforms in Korea.

Upon its introduction, in 1988, the NPS specified a target replacement rate of 70% for a 40-year career, which has since been reduced, to reach 40% over time. However, this target replacement rate results from a very specific scenario of contributing for 40 years with earnings at the “A value” for each year of contribution. The A value is the average eligible earnings of all contributors – eligible earnings are earnings capped at the contribution ceiling. If individual earnings are below the A value then the replacement rate is higher and vice versa (see below). Pension entitlements do not accrue in Korea from age 60 or before age 18, except under specific circumstances, so a 40-year career implies labour market entry at age 20 or earlier.

As the National Pension Scheme (NPS) was only introduced in 1988 it has yet to reach maturity and it is currently not yet possible to have contributed for 40 years. As the retirement age is increasing, reaching 65 in 2034, the earliest point that an individual who started to contribute at age 20 could retire after having completed 40 years is 2032 – contributing from the beginning at age 20 in 1988, then for 40 years until 2028, and retiring at the normal retirement age of 64. Until 2032, replacement rates will tend to steadily increase for new retirees as they will have been able to contribute for a longer period since 1988. For example, with labour market entry at age 20, people retiring at the national retirement age of 60 in 2000 were only able to contribute for 12 years, such that their replacement rate was low at 20.8% at earnings equal to the A value. This has increased to 44.7% for someone retiring in 2020 and will keep increasing to 55.4% in 2032 (Figure 3.1).

Recent reforms will gradually lower the target replacement rate (Chapter 2). Hence, after 2032 replacement rates will gradually decline for similar careers until 2073 when they stabilise at 40.0% for a full career from age 20 at the A-value wage, based on current legislation.1 Between 2032 and 2073 there will be a 15.4 percentage point (or 27.8%) decline in the replacement rate for a full career from age 20. This is a very large drop in international comparison: the average decline across OECD countries is 4.2 percentage points (or 7.6%) when comparing the pensions of the 1956 and 1996 birth cohorts ( (OECD, 2019[1])).

Later entry in the labour market leads to lower replacement rates in Korea as in many OECD countries. For people entering the labour market, the OECD assumes the career starts at age 22. As no entitlements are earned after age 60 in Korea, a full-career worker entering the labour market at age 22 will have paid contributions and accrued pension rights for 38 years only. This will generate a replacement rate of 38.0% for those starting their careers after 2028.

Pension replacement rates vary substantially with earnings level in Korea; workers with low earnings receive much higher replacement rates. For purposes of international comparison, the average-wage measure used by the OECD is the harmonised full-time adult average-wage earnings covering both manual and non-manual workers. It amounts to around KRW 3.8 million per month in 2020 in Korea. By comparison, the average eligible earnings of all contributors (A value) is KRW 2.4 million, i.e. 36% lower than the full-time average wage.

There are two reasons for this big difference. First, eligible or pensionable earnings that enter the calculation of the A value are capped at the ceiling, which was equal to 131% of the full-time average wage, whereas the OECD harmonised figure is an average of all earnings. In OECD calculations, the ceiling is only being applied as part of pension rules when computing contributions and pension entitlement. Secondly, the A value includes both part-time and self-employed workers, who have lower earnings, on average, than full-time employees in the private sector, which is the basis of OECD comparisons.

The gross replacement rate for a worker with A-value earnings and starting the career at age 22 in 2020 amounts to 38.5% based on the assumptions used in the OECD pension model, while the gross replacement rate at the average-wage level (“average earner” case) is lower, at 31.2%, given the redistributive nature of the NPS where the calculation of individual pensions uses the average of individual earnings and the scheme-wide earnings average (Chapter 2).

The net replacement rate (net pensions as a ratio of net earnings) matters more to individuals than the gross replacement rate as it better reflects their available income in retirement in comparison to when working. Pensioners pay a lower contribution rate than employees, or no contribution at all, as for example no unemployment and pension contributions are levied on pension benefits. With progressive tax systems, pensioners also usually pay a lower income tax rate than when working since net pensions are typically lower than labour earnings net of social contributions. In addition, in several OECD countries, pensions are taxed less than labour income at the same income level.2 As a result, net replacement rates are generally significantly higher than gross rates.

In Korea, pensions are liable for tax purposes in the same way as labour income. However, pensions are exempt from social security contributions, with the exception of some regional-based health insurance contributions. In that case, the reference income used is only 20% of the pension income against 100% of earnings for workers.

After a full career from age 22 in 2020 (hence projected to retire in 2063) the gross replacement rate of 31% at the average-wage level generates a net replacement rate of 35%. This is similar to that of Japan, at 39%, but very low compared to the OECD average of 62% (Figure 3.2). Only Estonia and Lithuania have lower future replacement rates for this baseline case. At the other extreme, Austria, Hungary, Luxembourg, the Netherlands, Portugal and Türkiye all have future replacement rates around at least 90% based on current legislation.

Low earners in Korea benefit from the strong redistribution in the way pensions are computed (Chapter 2). Half of pension calculation is based on individual earnings and half on the average eligible earnings of all contributors, which lifts entitlements for low earners and reduces them for high earners. Full-career low earners have a net replacement rate of 46%, which is 11 percentage points higher than for average earners (Figure 3.3). Many countries also have higher replacement rates for low earners than for average earners, mainly through flat-rate or safety-net benefits as, for example, in Australia, Colombia, the Czech Republic, Demark, Ireland and New Zealand. However, at less than 50% after a full career, the net replacement rate in Korea is very low as in Japan, Lithuania and Poland, compared with 74% in the OECD on average. For high earners in Korea the redistributive formula has the opposite impact, and the low ceiling of 131% of gross average earnings for pensionable earnings (Chapter 2) significantly reduces the individual component of the NPS. Combining these two effects leads to a net replacement rate of only 22% for workers at twice the average wage compared with 55% in the OECD on average.

Retirement before the normal pension age is possible for every insured person with a minimum of 10 years of coverage and aged at least 57, increasing to age 60 by 2029. Early retirement at age 57 is low in comparison to the other OECD countries; only Türkiye currently has a lower age in the mandatory scheme (Figure 3.4). Even with the increase by 2029 to age 60, the early retirement age in Korea will still be one of the lowest in the OECD.

In case of early retirement the pension is permanently reduced by 0.5% for each month that it is claimed before the normal retirement age. For example, given the retirement age of 62 years in 2020, if the benefit is claimed at age 57 the pension is reduced by 30%. In addition, compared with someone with a full career until the normal retirement age, pensions are also lower due to the impact of shorter contribution history. In the future, with the normal retirement age increasing to 65 and the early retirement age to 60, there will be no loss from missing contributions as entitlements do not accrue after age 60. Korea is an outlier in this among OECD countries, as contributions are normally mandatory until the statutory retirement age.

Taking this into account, for three years of early retirement there will be a pension loss of 7.0% per year (or 21.0% in total) compared with someone continuing to work until the retirement age at the same wage position, which is similar to the average of the 14 OECD countries for which this is a possible option (Figure 3.5). The projected loss is higher than the 6.0% (12 * 0.5%) penalty because pensions in payment are indexed to prices and so retiring early generates an additional projected loss as those continuing to work are expected to benefit from wage growth, which is generally higher than price inflation. Actuarial neutrality at retirement age in Korea is achieved with a benefit reduction of about 5% per year (OECD, 2017[3]), lower than the 6% penalty. The total pension loss from retiring early is higher in Japan, for example, at 8% per year for three years of early retirement.3 For one year of early retirement the pension is decreased by 7.2% in Korea, compared to 8.4% in Japan and 6.9% across the 18 OECD countries listed.

In Korea, it is also possible to defer pension payment by a maximum of five years, resulting in a higher benefit when eventually claimed. For each month of deferral beyond the normal retirement age the benefit is increased by 0.6%, i.e. by 7.2% per year. As contributions are not possible from age 60 in Korea, the pension increase from mandatory components when deferring relates solely to the bonus increment. By contrast, in most other countries additional entitlements from working longer further increase benefits.

When deferring, the underlying reference wage continues to increase in line with average earnings, whereas pensions in payment only increase with price inflation. Therefore deferring the pension generates a larger benefit than only implied from the 7.2% bonus per year when real wage growth is positive. Based on the OECD economic assumption of an annual real-wage growth of 1.25%, the total gain from deferring pensions by one year (without additional contributions and entitlements) amounts to 8.5% (Figure 3.6). This theoretically strengthens the financial incentives to defer retirement as such an effect is larger than implied by actuarial neutrality, especially as high life expectancy in Korea lowers the actuarially neutral rate. The impact of working longer on pensions is larger than in most OECD countries despite the absence of additional entitlements. It is around 1.5 percentage points higher than the OECD average, but is considerably below Japan’s level for example, which has an increase of more than 11% per year of deferral.

Whilst deferring pension payments in Korea leads to a high premium in the benefit level, a small share of older people use this. In 2016, only 5% of those reaching the retirement age deferred their pension, although that share is higher than in 2013 when it was less than 2%. Even though pension levels are still low, this is likely due to the fact that wages are typically lowered at older ages, creating income constraints, which income from pensions can help alleviate. Even lower levels are found in Japan where only 1.2% of pensions are deferred, while earnings levels typically decline by over 10% after reaching age 65.

The more common option in Korea is indeed to claim the NPS pension, either early or at the normal retirement age, and continue in employment at least for a few years. Data from the Korean Retirement and Income Study indicate that slightly more than half of NPS recipients in 2018 were in employment, either as an employee (24% of NPS recipients) or self-employed (28%).

Combining employment with pension receipt is done through the so-called “active old-age pension” in Korea. In this case, pension benefits are reduced depending on earnings levels, with the rate of reduction increasing as earnings increase (Figure 3.7). More precisely, earnings in excess of the A value lead to a benefit reduction: the first KRW 1 million in earnings above the A value leads to a reduction in the pension payment of 5% of the excess earnings, and this rate increases gradually to 25% for earnings over KRW 4 million above the A value. However, the maximum reduction permitted is capped at 50% of the pension benefit.

By reducing pensions based on employment income after the normal retirement age, Korea is one of only seven OECD countries, along with Australia, Denmark, Greece, Israel, Japan and Spain, with such a mechanism, which is akin to an additional tax on labour income at older ages. In the other OECD countries, pensions and wages receipt can be combined without penalty once the retirement age has been reached.

In practice, the reduction of the benefit level does not apply for the majority of Korean pensioners who continue to work. Their average monthly salary is at most KRW 2 million for 58% of all employees or self-employed aged 60 to 69, below the A value threshold. This share increases to around 90% for those aged 70 to 79.

Career length is an important factor for pension entitlements, and short and interrupted careers usually lead to lower pension levels. Pension entitlements are not equally sensitive to incomplete careers across the OECD, however. While very short career breaks tend to reduce future pension levels only to a limited extent in most OECD countries, longer breaks might pose serious challenges for old-age income.

When unemployed in Korea, individuals receive an unemployment benefit for a maximum of one year. The benefit is 50% of the average wage over the last three years, with a monthly ceiling of KRW 700 000 (or 18% of the monthly average wage). Pension entitlements accrue based on this benefit with the state paying 75% of the contributions and the individual the remaining 25%.

On average, five years of unemployment will result in a pension of 90% of that of a full-career worker in Korea, whereas the impact is less on average across the OECD, with a relative pension equal to 94% at the average-wage level (Figure 3.8).4 Out of a 43-year career (from age 22 to 65), a five-year break represents 11.6% of the career length, so the 10% impact on pensions in Korea suggests that there is limited pension protection against unemployment.

Figure 3.9 illustrates the case of a much more incomplete career. In Korea, average-wage workers who enter the labour market five years later (at age 27 in this case) and experience a 10-year unemployment spell during their career will face a pension reduction of 38% compared to the full-career case. This is the highest impact of any OECD country. In most OECD countries, the entitlement loss in mandatory schemes ranges between 10% and 30%, with an average of 24%, but it exceeds 35% in two other OECD countries, Latvia and the Slovak Republic.5

If there was no offsetting mechanism to limit the impact of short careers on pension levels – i.e. purely from an actuarial point of view -, such an incomplete career scenario would lead to a drop of about 40% in pension benefits ( (OECD, 2019[4])). The pension loss in Korea is only slightly less than that, as there is a limited level of support in Korea during periods of unemployment. On average in the OECD, redistributive components and flat-rate benefits offset more than one-third of the shortfall, bringing it down from 40% to 24%. The types of support include: residence-based pensions where a career break has no affect; longer periods of unemployment being credited, either based on past earnings or at a flat rate; and, requiring to delay retirement to avoid penalties given lost contributions, which generates additional entitlements.

For low earners in Korea, the pension reduction at about 25% in that case (compared with full-career workers at the same earnings level) is much lower than for average earners – although still substantially more than in the OECD on average, at 17%. This is because the non-contributory basic pension applies in this instance, boosting total benefits by about 20%. In 10 OECD countries, the pension loss due to such an incomplete career is much bigger, including in Germany, Latvia and the Slovak Republic where it is larger than 35%.

For career breaks due to childcare, periods of maternity of up to 90 days including at least 45 days right after the birth, are considered as periods of actual work and are taken into account to determine pension entitlements in Korea. Wages for these periods are paid at 100%, with the employer generally covering the first 60 days and the government covering the remainder. Since 2008, having at least two children results in up to 12 months being credited to either the mother or father’s pension calculation, or split between the two, after the birth of the 2nd child, and 18 months for each subsequent child, with a maximum credit of 50 months. The credited amount is the average of the individual’s average total insured income over the three years prior to the birth.

Korea is unique amongst OECD countries that provide childcare credits, in that the first child is not covered beyond maternity payment. Under the scenario of taking career breaks due to having two children only one year is credited towards the pension system irrespective of the duration of the break. For a five-year break this results in a fall in pension of around 10% (Figure 3.10), compared to a fall of only 5% across the OECD as a whole. In OECD countries, credits for childcare typically cover career breaks until children reach a certain age. They are generally less generous for longer breaks and for older children. Many OECD countries credit time spent caring for very young children (usually up to 3 or 4 years old) as an insured period and consider it as paid employment for pension purposes.

When considering only two children, the credit applied in Korea does not increase for longer periods of childcare break, as only one-year of credit is granted in total. Therefore, subsequent absences only reduce the pension further (Figure 3.11). For a 10-year career break the pension declines by 23% compared to the full-career case, whilst the pension loss is half of this level, at 11%, on average in the OECD. For low earners the reduction is slightly lower at 20% in Korea due to the effect of the non-contributory basic pension, similar to most other OECD countries with the pension loss falling to 6% on average.

Whilst both men and women can claim childcare credits, in the majority of cases women take the career break to care for children therefore taking up this credit to compensate for the impact on pension. This, however, is not the only measure designed to increase pensions for women. For example, full-time housewives, with no actual earnings, are able to join the NPS as voluntarily insured. Others contributing as voluntarily insured have to contribute as if they had earnings at least equivalent to the A value, but these housewives are able to choose a lower income bracket for their contributions, thereby reducing their contribution payment, but still gaining future entitlement to a pension (UNESCAP, 2016[5]). In addition pensions from both spouses are split in the event of divorce.

The self-employed are not mandatorily covered within pension systems in all countries, and often the rules that apply differ from those of dependent employees. Korea is one of ten OECD countries along with Canada, Costa Rica, the Czech Republic, Estonia, Lithuania, Luxembourg, Portugal, Slovenia and the United States where the self-employed contribute in a similar way as employees do.

In another 19 countries, while self-employed workers are mandatorily covered by earnings-related schemes, pension coverage is limited because they are allowed to contribute at lower rates than employees (Austria, Belgium, Chile, France, Iceland, Israel, Italy, Latvia, Norway, Sweden and Switzerland), with flat-rate contributions (Colombia, Greece, Hungary, Poland, Spain and Türkiye) or minimum income thresholds below which they are exempt from contribution obligations (Austria, Chile, Finland, Latvia, the Slovak Republic and Türkiye). In Australia, Denmark, Germany, Japan, Mexico and the Netherlands, the self-employed are, in contrast to employees, not required to join earnings-related schemes.6

In the full-career average-wage case, the relative pension of the self-employed in Korea is 95% that of employees, well above the OECD average of 75% (Figure 3.12). By comparison the level is around 40% or even much lower in Mexico (32%), Japan (34%) and also Denmark, Germany, the Netherlands and the United Kingdom. In countries where the self-employed are not required to contribute to earnings-related pension schemes the relative pension level is among the lowest as the old-age pension from mandatory schemes of the self-employed is limited to first-tier benefits.

To better identify what the pension system produces, these estimates are based on the same level of income for the self-employed as for the private-sector worker, even though in Korea, as in many other countries, the self-employed typically have lower incomes. The main cause is the under-reporting of income, with verification processes often being inadequate. Under-reporting leads to both higher net incomes in the short term and lower pensions in the long term.

Upon its introduction in 2008, the non-contributory basic old-age pension was designed for those aged 70 and above with an income below a threshold, targeting 60% of this population group. The initial maximum benefit level was set at 5% of the A value i.e. 3.2% of average earnings. In July 2014, the benefit was doubled to 10% of the A value. The 2018 reform further increased the maximum benefit by one-fifth so that it now stands at 7.8% of average earnings. In addition the 2018 reform changed the target population to 70% of those aged 65 or over. Despite these increases, the old-age safety-net level remains one of the lowest within OECD countries, with only Colombia, Hungary and Latvia having lower levels (Figure 3.13). Such a low level in Korea is not sufficient to effectively fight against old-age poverty.

The maximum non-contributory basic pension was KRW 300 000 per month in 2020,7 payable to those receiving the National Pension Survivors’ Pension or Disability Pension and for National Basic Livelihood Security beneficiaries. This maximum benefit is withdrawn against the national pension amount at a rate of one-third until the national pension in payment reaches KRW 900 000 (Figure 3.14). From this level, the non-contributory basic pension benefit is thus halved and remains constant. However, the pension is also means-tested against eligible income and assets, with no benefit being paid when income is above KRW 1.69 million for singles and KRW 2.70 million for couples.

Countries design their safety-net benefits differently and may also provide additional non-cash benefits to the elderly, making direct comparison difficult. Those that are more developed economically might be able to afford more generous safety nets. This is what is suggested by comparing the old-age safety-net level with GDP per capita, which shows a positive correlation across OECD countries (Figure 3.15).

Yet, safety-net benefits available to (single) individuals who have never contributed to old-age pensions are much lower in Korea than in countries with a similar level of economic development, such as the Czech Republic, France, Israel, Italy, Japan, New Zealand and Spain. For example, among these countries, the safety-net benefit in the Czech Republic is the next lowest at 10.7% of average earnings compared to 7.8% in Korea. In Italy, Japan and Spain it is around 18-19%, 25% in Israel and just under 40% in New Zealand.

Despite its low level the non-contributory basic pension has been providing an increasing level of support to recipients. In 2013, the non-contributory basic pension raised the average income of recipient households by 9.7%, but following the doubling of the benefit level from 2014 income was increased by around 19.4% in 2015 and was 18.5% in 2020.8

The non-contributory basic pension is entirely financed by general taxation. As the benefit is being targeted at the poorest 70% of those aged 65 or over, the total number of recipients increases with population ageing. The cost of providing the benefit has increased accordingly from 0.6% of GDP in 2015 to 0.8% in 2019. Despite a projected increase of 50% in the number of recipients by 2027, expenditure is only actually predicted by the National Assembly Budget Office to increase to 0.9% of GDP. The low increase in expenditure is explained by the continuing maturing of the NPS thereby significantly reducing individual entitlement to the non-contributory benefit as it is means-tested.

Many of the current pensioners in Korea were not able to contribute towards the NPS during their working lives and therefore the non-contributory basic pension is particularly important to them. However, in the future more and more pensioners will have been able to build their own pension entitlements, therefore the coverage of the non-contributory basic pension could be narrowed, enabling higher amounts to be paid to those most in need (OECD, 2022[7]).

Figure 3.16 shows the total net pension level for low earners (50% of the average wage) depending on the length of their contribution period. The minimum requirement for eligibility to a NPS pension is 10 years; those with shorter contribution histories are eligible to the full non-contributory basic pension (when assuming no additional income). Once eligible to a NPS pension, the safety-net payment is sharply reduced, but total pension income increases significantly thanks to the NPS component. The non-contributory basic pension is then gradually withdrawn until 21 years of contributions are made, from which point it is totally eliminated. Overall, 10, 25 and 38 years of contributions at low wages generate a net pension of 11.4%, 16.5% and 24.7% of the net average wage respectively, compared with 9.2% for individuals with less than 10 years of contributions.

Several targeted benefits exist in Korea to cover separate areas of additional needs among the entire population; they are not specifically targeted at the elderly, with few exceptions discussed below. They cover medical requirements, housing support or basic livelihood support amongst others. These benefits are available for households with incomes below between 30% and 50% of the median level, depending on the benefit. Around one-third of the 1.6 million recipients are aged 65 or over, representing about 10% of this older population group.

There are two schemes that are more specific for the elderly population: the Senior Long-term Care Insurance and reverse mortgages. Senior Long-term Care Insurance provides support and assistance to the elderly who have difficulty carrying out daily activities. Once the degree of support required has been assessed the benefit is paid with no income or asset test involved. As of December 2019, just under 10% of the population aged 65 or above, and 27% of those aged 80+, received the benefit, with an average payment of around 28% of net average earnings.

The second scheme is a state-backed “home pension” reverse mortgage programme, where an older person can receive a pension benefit for a set duration (term type) or for life (tenure type). Eligibility is granted to Korean citizens who are at least 55 years old and own a house the value of which does not exceed KRW 900 million (USD 800 000). Reverse mortgages had only been taken up by around 1% of those aged 60 or over by the end of 2018 (Choi, Lim and Park, 2020[8]).9

Beyond the NPS for private-sector employees, four separate schemes also exist for different occupational groups (Chapter 2):

  • the Government Employees Pension Scheme (GEPS) covers all civil servants working in either the central administration or local governments, including public school teachers, police officers, fire fighters, judges and prosecutors;

  • the Military Personnel Pension Scheme (MPPS);

  • the Private School Teachers Pension System (PSTPS).

  • the Special Post Office Pension Scheme (SPOPS).

The key parameters of these schemes are presented in Table 3.1. The retirement ages are being equalised at age 65 over the long term across all schemes, with the exception of the MPPS which only requires a contribution period but does not have any retirement age. The more recent reforms to the four special regimes have led to increases in contribution rates. The contribution rate for the NPS is now only half of that of both the GEPS, PSTPS and SPOPS, which are calculated in the same way based on the same parameter values.

All of the special schemes generate much higher replacement rates than the NPS for full-career workers. As shown above, the future gross replacement rate after a full career starting from age 20 is 40% for an A-value earner within the NPS. For a government employee within the GEPS and for a private school teacher within the PSTPS, this base-case replacement rate is 61%, with 36 years of contribution, after which there is no further accrual. For a military employee the maximum accrual is reached after a contribution period of 33 years, resulting in a replacement rate of 63% (Figure 3.17). Once these maximum periods are reached, contributions are no longer paid. Overall, pensions received by private-sector workers are much lower than those provided by the other regimes, as not only is the replacement rate much lower for a full career but the A values are considerably different, with the A value for the GEPS being more than twice that of the NPS.

It is also easier for employees within any of the special schemes to achieve the target replacement rate as there is no age limit to making contributions and accruing entitlements, contrary to the 60-year ceiling in the NPS, until the maximum duration is met, i.e. 36 years in the GEPS/PSTPS or 33 years in the MPPS. Therefore for all the special schemes the target levels could still be reached with a career starting at age 25, for example, whereas in the NPS this would only permit 35 years of contribution therefore lowering the replacement rate to 35%.

For those earning 50% of the A value10 the gross replacement rate from the NPS is 60% after a full career, higher than for average workers because of the redistributive element. Both the GEPS and the PSTPS also have a redistributive element, along the lines of that in the NPS. For those at 50% of the A value (which is scheme specific) with either the GEPS or the PSTPS the gross replacement rate is equal to 92%. For those earning twice the A value, the gross replacement rate is 30% in the NPS, whilst in the GEPS and PSTPS it is 40%, as there is a ceiling to contributions at 1.6 times the scheme A value. In the MPPS the pension is simply 1.9% of the average monthly income for each year of contribution – with no redistributive element – as the MPPS did not enact any of the 2015 reform – giving a gross replacement rate of 63% across all earnings levels.

Substantially higher contribution rates than for the NPS (Table 3.1) help explain the large gap in pension levels. Current legislation will result in the contribution rate of the NPS being half that of both the GEPS and PSTPS, with contributions in all cases being split equally between the employee and the employer.

In the special regimes it is possible to take a lump sum instead of a pension at the point of retirement, even with a full career. The lump sum is given by the formula:


where LS is the lump sum, FI is the final standard monthly income, T is the length of service in years and Z is the cap to service years.

For example, for a 36-year career, the equation becomes:

LS = FI * 36 * [0.975 + (36-5)*0.0065] = FI * 36 * [1.1765] = 3.5295 * (12 * FI).

That is, the lump sum equals about 3.5 years of the last earnings in that case – it is slightly less for military personnel as the maximum contribution period is 33 years instead of 36 years. These lump-sum amounts are very low actuarially compared with the acquired pension entitlements, i.e. much lower than the so-called pension wealth (the total discounted value of the lifetime flows of pension payments calculated by the OECD). Hence, only people who expect to have a very short life after retirement have any interest to opt for the lump sum.11 In practice over the last 15 years, only around 5% of new claimants on average took the lump sum, with lump sums accounting for only 2% of expenditure in 2019.

Replacement rates generated from a government pension in Korea are over twice as high as those for private-sector workers at the average-wage level (Figure 3.18). These replacement rate values are calculated based on the average OECD earnings figure for each country, using the same earnings level for both private- and public-sector workers. However, unlike in other countries where only the wage level matters to the calculation, in Korea, the scheme-specific A values are equally relevant. For the NPS the A value is much lower than the OECD average wage figure, whilst the A value for the GEPS is much higher. This results in the replacement rate for average earners in the NPS being much lower than at the scheme-specific A value (Figure 3.17) with the opposite being true for the GEPS.

For civil servants only Canada, the United Kingdom and the United States also have such a proportional difference in replacement rates between private- and public-sector workers as in Korea based on mandatory pension schemes. Belgium, Germany, Ireland and Norway also record large differences between the two sectors. In most of these countries, large voluntary schemes for private-sector workers may narrow the gap. Of the other 10 countries shown, half have no pension gap as the pension rules that apply to public and private sector workers are the same, although they are managed separately (Chapter 2); the other half of countries have gaps under 10 percentage points due to small top-ups. All of the remaining OECD countries, not included in the chart, have the same scheme covering both public- and private-sector workers.

Only Korea along with Belgium, France and Germany have entirely separate schemes (Table 2.7). In terms of absolute levels, the long-term replacement rate for a full-career average-wage civil servant in Korea is 73.6% close to those in Austria, Belgium Germany and the Netherlands, but much lower than in Canada, Denmark, the United Kingdom and the United States.

In Korea, the non-contributory basic pension is entirely financed from the government budget. NPS benefits are currently financed by employee and employer contributions, consistent with a pay-as-you-go (PAYG) rationale. Without any pensions paid for about two decades, pension contributions exceeded pension payments, cumulating in a very large, at least for the moment, reserve fund, the National Pension Fund (NPF). The NPF was created as a separate body to safeguard these contributions and reserve sufficient funds to finance the pay-out of NPS pension benefits. The NPS is managed by the state and future liabilities will fall on the government if there are imbalances.

The NPS collects contributions and pays pensions. It manages benefit calculations and ensures compliance with the rules of the system, but the financial responsibility falls under the NPF. The NPF is therefore the financial wing of the NPS. NPF income comes from both paid contributions and from investment returns of the reserve fund. All contributions to the NPS are transferred to the NPF, which is also responsible for financing the benefit payments. Therefore, the only direct expense of the NPS are its administrative costs.

When the NPS was introduced in 1988, there was no “gift” to the older people of that time who had not contributed during their working lives. This is in contrast to the usual introduction of a PAYG system, but it was similar to the introduction of the Japanese national pension system in 1961.

Although there was no gift for current retirees in 1988, the first generations of NPS retirees have benefited from favourable rules. The first generations of pensioners were able to retire with benefits that are much larger than implied by actuarial fairness. To help correct this, the accrual rate was reduced, from 0.75% upon the introduction to 0.625% in 2008 and 0.5% in the long term (Chapter 2 for details). Moreover, the contribution rate was increased from 3% in 1988 to 9% in 2008. The level of the pensions based on the initial sets of parameters will contribute to the gradual depletion of the NPF.

Before the 1998 reform, the NPF was not dedicated to pension financing but managed as an investment source for economic and social welfare development. Initially the NPF deposited the bulk of its funds in the Public Capital Management Fund (PCMF) to finance public-sector investments or invested in social welfare projects. In 1994, 86% of the new contributions were deposited in the PCMF, with the remainder in bonds and stocks. The proportion of reserve fund assets invested in the public sector increased in the 1990s from 55% in 1988 to 72% in 1998, while NPF investment returns were lower than expected. Indeed, between 1988 and 1998, public-sector returns outperformed the finance sector (bonds and stocks) only once, in 1997 (NPS, 2004[9]). Between 1988 and 1998, most of members of the National Pension Fund Management Committee (NPFMC), which is responsible for managing the NPF, were related to the government and the governance of the NPF had serious weaknesses (Kim and Stewart, 2011[10]).

The 1998 reform changed the composition of the NPFMC and abolished the mandatory deposit to the PCMF in order to improve both investment returns and governance. As a result, the proportion of assets invested in the public sector fell abruptly from 68% in 1999 to 5% in 2004. The new members of the NPFMC then included staff representatives, representatives for the individually insured and fund management experts; government’s influence was reduced accordingly.

In recent years, NPF expenditures have increased in line with the growing number of pensioners who had steadily built larger entitlements. Pensions in payment rose from 0.6% of GDP in 2008 to 1.4% of GDP in 2020 with contribution revenues increasing from 2.0% to 2.7% of GDP (Figure 3.19). The greatest variation is found in the investment returns, which were negative in both 2008 and 2018, but have otherwise been around 1-2% of GDP, with the exception of 2019 and 2020 which saw returns at just under 4% of GDP. This has therefore led to overall surpluses of around 2-3 percentage points of GDP per year, and around 5 percentage points in recent years. These surpluses cumulated and led to more than a doubling of NPF assets as a share of GDP, from 20.4% in 2008 to 43.1% in 2020 (Figure 3.20).

According to the 4rd Actuarial Review conducted in 2018 (Box 3.1), pension expenditure will begin to exceed contribution income from 2030. However, projected investment returns within the NPF will initially be sufficient to cover the gap, so that no deficit is projected before 2042 (Figure 3.21). Annual deficits from 2042 onwards will gradually deplete the reserves.

If the current system continues as is, the NPF would be totally depleted by 2057 based on the 4rd Actuarial Review (Figure 3.22). This is three years earlier than based on the 3rd Actuarial Review, conducted five years before, because of revisions in the economic outlook and birth rates. Based on current parameters, once the reserve fund is depleted, the NPS will accumulate growing and large deficits (Figure 3.22). In the absence of reform, the NPS will then be financially unsustainable; in 2070, the accumulated debt would reach around 75% of GDP (NPS, 2018[11]).

Since its inception, with the anticipated retirement of the baby-boom generations (in Korea this corresponds to people born between about 1955 and 1963), the increase in life expectancy and the decline in birth rates, the NPF depletion was expected. The 1986 Korea Development Institute report, released two years before the pension system had even been introduced, projected the full depletion of the NPF by 2049 (Kim and Stewart, 2011[10]). Past reforms have allowed to delay the expected time of the NPF depletion, albeit without ensuring long-term financial sustainability.12

The population aged 65 or over is projected to more than double from 8.0 million today to 17.5 million by 2060 (Chapter 1). With future generations of pensioners building larger pension entitlements, pension expenditure will increase at an even faster rate. In a balanced PAYG system without any reserve fund, the average pension relative to the average wage is equal to the contribution rate times the contributor-to-pensioner ratio. By 2060, based on UN demographic projections, there will effectively be one person of working-age for every person of pension age. So if the reserve fund is fully depleted, in the following thought experiment which assumes both full employment and full retirement at the normal retirement age, the average benefit ratio is equal to the effective contribution rate to ensure financial balance. Once the fund is depleted, if the average benefit ratio is larger, then the government will have to fill the financial gap every year. A theoretical replacement rate of over 30% for a full-career average earner may thus require a substantial increase in the contribution rate for the pension system to remain sustainable. In short, the current parameters of the system are not set to deal with long-term demographic trends.

In order to balance the NPS as a PAYG system every year – that is, ignoring part of the financing coming from the returns on NPF assets –, the contribution rate will need to increase. As there have been relatively few pensioners currently and as they have low benefit levels, the required contribution rate was only 4.6% in 2018, according to the 4th Actuarial Review (Table 3.5) and 5.2% in 2020, still well below the actual contribution rate of 9%. However, this required balancing rate is going to increase quickly with rising expenditure, reaching 9.0% – equal to the current contribution level – in 2030 according to the projections. This is when pension expenditure will begin to exceed contribution income as discussed above. After this point the current contribution level will be insufficient to cover spending. By 2060, expenditure will amount to 7.5% of GDP compared to 1.4% currently and the associated PAYG rate will be 26.8%, about three times the current contribution rate.

As the NPF is projected to be depleted from around this time, such a rate would be more consistent with ensuring long-term financial sustainability. Reaching this balancing rate earlier would allow to avoid the depletion of the NPF and maintain a partially funded system. The earlier the long-term contribution rate is reached, the larger the share of funding within the NPS financing mix. Of course, other pension parameters can also be adjusted to reach the long-term balance, such that the whole burden does not fall on the contribution rate only.

The 4th Actuarial Review set several options for the fund level in 2088, the last year of the forecast period, and calculated the required contribution rate to achieve them. Assuming changes had been made from 2020, the contribution rate required to have a reserve-to-annual-expenditure ratio of 100%, would have been 16.0%. Alternatively, if the reform were only to be enacted in 2040 then the contribution rate would need to be higher at 20.9%. Increasing the reserve-to-expenditure ratio to 200% or 500% obviously results in higher contribution levels. Similar reviews have been conducted in other countries, with Japan, for example, opting for reserve funds equivalent to one year’s worth of pension benefit costs in about 100 years (Box 3.2).

Increasing the contribution rate is not the only option to raise pension revenues. Many countries use taxation to finance parts of the pension system and diversify the sources of pension financing. A close link between individual wages and pension entitlements provides a strong reason to finance pensions out of contributions based on labour income. However, the redistributive components of pension systems can be financed either by contributions or taxes. That choice is normative depending on social preferences. Redistribution financed by contributions increase the perception that the latter may be perceived as taxes.

In the majority of OECD countries, pension credits are given for periods of absence from the labour market because of child care or unemployment (Section 3.2.2). Such provisions have only been added in Korea in the last 15 years. Unemployment credit is covered by government revenues financing 75% of the pension contributions of those receiving unemployment benefits for up to one year. By contrast, no contributions are paid to finance childcare credits.

Financing pension instruments to cushion the impact of career breaks within the pension system itself is one option; many other countries finance them thorough an extra payment transferred to the pension system, for both unemployment and childcare, and in some cases general care periods, such as for elderly relatives. Top-up or redistributive components in otherwise contribution-financed systems, such as basic or minimum pensions, are also often financed through taxation. In Korea the non-contributory targeted basic pension is financed through general taxation, as is normally the case for such safety-net benefits. However, the component of the NPS that is based on the average wage of all contributors is financed within the system. The additional entitlement provided by this component for those earnings less than the A value could, for example, be financed by taxes, improving future pension financial sustainability.

The capacity to increase either direct contributions or taxes to finance some pension components depends on the level of tax wedge, which for a worker corresponds to total taxes and contributions as a percentage of labour cost. For an average earner in Korea the current tax wedge is low at 23%, compared to an OECD average of 36%, suggesting that there is some room to increase general taxation (Figure 3.23). The difference in the tax wedge between Korea and the OECD average is similar across all earnings levels.

Unlike for the NPS, there is no longer any reserve fund for the GEPS. The scheme started to go into deficit in the mid-1990s and the fund was totally depleted in 2001. Since then the government has had to finance the running deficits. The 2009 and 2015 GEPS reforms (Chapter 2) have lowered the state financial burden by reducing future pension entitlements and raising the contribution rate paid by both employees and the state as the employer.

While currently, within the GEPS, the number of pension recipients as a proportion of the number of employees is 46%, it is projected to increase to 77% by 2060, raising financial pressure to balance the scheme (GEPS, 2019[12]). Pensions in payment are projected to increase from 0.8% of GDP in 2020 to 1.0% by 2030 and to remain at this level in the long term. Current pension contribution revenues – both employee and employer payments – only covered 82% of the expenditure in 2020 and during the next decade this ratio will fall sharply to around 60%. Hence, the latest projections indicate that the deficit of the GEPS will increase from 0.1% of GDP in 2020 to 0.4% of GDP in 2040 and to 0.6% of GDP in 2060, assuming that population and economic growth follow the current trend (GEPS, 2020[13]).

The rules governing the PSTPS are the same as for the GEPS (Chapter 2), but the financial positions differ markedly. Whilst the reserve fund of the GEPS was totally depleted 20 years ago, this is not the case for the PSTPS, although it is subject to financial pressure. As for the other Korean pension schemes there are regular actuarial reviews providing long-term estimates of the financial position.

The latest Actuarial Review conducted in 2016 forecasts that the reserve fund for the PSTPS will start to go into deficit in 2035 after reaching a peak of KRW 31.1 trillion in 2034 (0.9% of GDP) (Table 3.7). After this, it will take a further 16 years, until 2051 for the reserve fund to be totally exhausted. Comparing the 3rd and 4th projections indicates that the impact of the 2015 reform, where future benefit entitlements were lowered and contribution revenues increased, shows that the deficit of the reserve fund is delayed by an additional 12 years and fund exhaustion is delayed by 18 years.

The MPPS generally followed the rules of those of the GEPS and PSTPS except that none of the elements from the 2015 reform to the GEPS and PSTPS were applied to the MPPS. Also, as for the GEPS, the pension financial burden has been met by the government with expenditures already exceeding revenues.

The current expenditure of the MPPS is around twice the amount of total contribution revenues (i.e. from both employees and the employer). The government is currently providing additional funding equivalent to 0.09% of GDP. The funding gap will decline over time as a percentage of GDP, due primarily to the relatively small number of personnel involved and will stand at 0.07% of GDP in 2050.13

Korea has made tremendous progress towards improving social security in old age over the last decades, but the pension system has not reached maturity yet. The introduction of the National Pension Scheme (NPS) in 1988 was a major achievement. The initial values of pension parameters have enabled to raise the income prospects of the first cohorts of NPS retirees well beyond what their contributions could have financed. This also means that these parameter values could not be maintained over time, and substantial reforms have been implemented to improve financial sustainability. Major reforms included: higher contribution rates, lower benefit promises and higher retirement ages. Moreover, the 1998 reform of the management of the National Pension Fund (NPF) led to significant upgrades in its governance and financial investment policy. Overall, the assessment of NPS income and financial prospects is backed by solid analyses conducted in regular actuarial reviews. Furthermore, the introduction of the safety-net basic pension in 2007 has provided small benefits to the most needy.

Despite significant progress, much more needs to be done. Current defined benefit pension promises generate low pension levels, still leading to high income vulnerability in old age. One severe difficulty arises from the exceptionally fast demographic changes that the country faces, which implies that even these low future pension levels cannot be financed in a sustainable way without further important reforms. This means that Korea has to tackle the formidable joint challenge of raising pension levels while enhancing pension finances. As both contribution levels and coverage rates are low, and the pension system remains fragmented, a number of reform options exists to make the Korean pension system better fit for purpose, raising old-age social protection in a sustainable way.

This review focuses on pension policies to improve contributory pensions, with at least two implications. Even though contributory pensions are not stand-alone and interact with the means-tested basic pension component, this review does not include recommendations to improve old-age safety nets. In addition, the effectiveness of some of the proposed policy measures would be enhanced by labour market changes, primarily related to the practice of enforced retirement before the statutory retirement age, itself closely related to seniority-wage practices. Yet, labour market reforms are not within the remit of this review. Recent OECD work has discussed these (OECD, 2018[14]).

Boosting contribution rates is a priority, in order to both improve financial sustainability over the long term and raise retirement income prospects. The current NPS contribution rate, at 9%, is very low compared with levels in other OECD countries, with the average rate being more than twice larger than Korea’s. More than half of OECD counties have a contribution rate of 20% or more, and the highest is 33% in Italy. In Korea, the contribution rate of the government scheme is much higher at 17%. The sooner the contribution rate is raised the larger its effects will be and the later the reserve fund will be depleted or the larger the long-term size.

Conditional on sound finances, some of the increased revenues could be used to increase the NPS accrual rate, which would then lead to pension increases across the board. Moreover, maintaining at least a small reserve fund in the future, as has been decided in Japan for example (Box 3.2), would protect the pension system from short-term shocks, such as a sudden cyclical spike in unemployment resulting in a fall in contribution levels.

There are no mandatory contributions to the pension system after age 59, unless individuals have not contributed for at least 10 years and are therefore not entitled to a pension at retirement age; in that case, additional contributions can be made up until age 65. This is despite the retirement age increasing to 65 by 2034. As contributions are not made, no pension entitlements accrue. Such a situation is unique amongst OECD countries. In every other country, except Japan, contributions are mandatory until at least the statutory retirement age; in Japan, where the statutory retirement age is 65, contributions to the basic flat-rate scheme are voluntary for those aged 60 to 64 if they have not met the eligibility criteria at age 60 or have not made 40 years of contribution to be eligible for a full pension.

If contributions were made until the future retirement age of 65, the projected net pension in Korea would increase by about 13%, from a replacement rate of 35.4% to 39.9% for an average earner with a full career from age 22 in 2020. Whilst this would still be well below the OECD average, this would represent a significant increase. Those with interrupted careers may even benefit relatively more from the contribution extension after age 59 since it can offset a larger part of their (shorter) career. Moreover, this increase will generate short-term NPS revenues.

When pensions were initially introduced in Korea they covered only public-sector workers, as was the case historically in many other countries. However, over time there has been an alignment in the pension schemes within the majority of OECD countries, which now apply the same scheme to both public- and private-sector workers. Korea is among the only four OECD countries along with Belgium, France and Germany that have entirely separate pension schemes covering private- and public-sector workers.

Uniting all workers under one system would eliminate inequalities between different occupational sectors and reduce administration costs. Previous rights accumulated within any of the special regimes i.e. GEPS, MPPS or PSTPS should be preserved, but, after a period of transition, future rights should follow whatever reforms are made to NPS regulations. NPS assets should then be transferred to the unified scheme and not be used to pay liabilities that have accrued in special regimes. Gradually, all workers should be enrolled within the same pension system.

Within the current NPS design, contributions and entitlements to the pension system are capped at around 130% of average earnings, which is very low in comparison to other OECD countries. This contributes to underfunding and low future pension promises. Raising the ceiling would improve financial balances over the medium term, thereby delaying the date at which point the reserve fund is depleted. Moreover, increases in the ceiling leads to higher pensions of all new retirees as the A value automatically increases.

Although in principle the pension system covers all workers, there are substantial gaps in the levels of coverage, particularly among the self-employed, with around 45% of the “individually insured” not being liable for contributions. There is currently no mechanism in place to effectively verify the income levels of the self-employed, which results in the under-reporting of income.

Although intended to increase coverage by offering incentives to encourage employees with low wages in small companies outside the pension system to join, the Duru Nuri Social Insurance Support Project (Chapter 2) has only slightly increased the number of NPS contributors. It has generally been an expensive scheme for very little reward overall. Therefore replicating such a scheme for the self-employed would have limited benefit. Rather there needs to be increased co-ordination between the National Pension Service and the tax authorities to ensure that an accurate recording of incomes, and therefore contribution bases, is achieved. Reducing under-reporting would increase the A value as the average income of the individually insured will rise, thereby raising pensions for everyone.

As is the case with Employment Insurance, many employers are also evading their obligations to enrol workers, as only 85% of regular workers are registered in the national pension system (OECD, 2018[14]). NPS coverage could be improved by increasing the penalties for employers who do not enrol their workers and expanding the resources and mandate of the labour inspectorate to control compliance of employers.

By contrast to many OECD countries, revenues from the state budget play a very limited role as a source of NPS financing in Korea. As additional revenues will be required given their current low levels and the size of projected imbalances driven by ageing, financing from the state budget is likely to be part of the equation. In particular, as discussed above, redistributive components of pension systems can be financed by either contributions or taxes. NPS benefits are based on a very redistributive pension formula through the role played by the A value on top of other redistribution mechanisms, but they are almost entirely financed by current contributions and past contributions that have fuelled the NPF. There is ample room to raise non-contributory revenues should policy makers decide so.

In the ageing context, increasing the retirement age is a common policy recommendation to encourage longer working lives and help with pension sustainability. However, in Korea as the pension system has yet to fully mature and benefits are low, the retirement age has less impact on working behaviours than in most other OECD countries. Hence, many Koreans work until a late age, with the average labour market exit age being around four years above the statutory retirement age. Despite this, the retirement age remains a key parameter even in Korea, as it should over time have a greater influence on the effective ages of retirement, particularly from the main job, contributing to limiting the usual practice of employees being forced to leave at an earlier age.

Population ageing is more rapid than in any other OECD country with Korea going from the second youngest country in 1980 to the oldest by 2060 based on UN projections of the demographic old-age to working-age ratios (Chapter 1). This rapid ageing results from a very low fertility rate and a large increase in life expectancy, both negatively affecting pension finances: remaining life expectancy at age 65 is projected to increase from 15 years in 1990 and 21 years in 2020 to 25 years in 2060 based on UN data. Financing a pension for 25 years based on contributions during 40 years will require much higher contribution rates, lower pensions or a combination of both. Increasing the retirement age further would help alleviate some pressure on contribution rates and pension benefits.

As a mechanism for automatically incorporating changes in life expectancy into the pension system, many countries have linked retirement ages to life expectancy. The exact form of the link differs across countries. In Denmark for example, the duration of retirement is being held constant, implying that all life expectancy gains are passed into increases in the retirement age. In most other countries, the balance between the working year and retirement period is being held constant, with around two-thirds of life expectancy increases being applied to the retirement age.

Applying the two-thirds rule in Korea from 2035, after the current legislated increases have finished, would result in a retirement age increase of two years up to 67 for those retiring in 2065. This would place Korea about one year above the OECD average, and would better reflect it having the highest old-age to working-age ratio from 2050. Beyond this life-expectancy link, the already legislated increase to age 65 could be accelerated, for example increasing by one year every three years rather than every five years as currently planned, thereby with age 65 becoming the statutory retirement age from 2030.

In many countries, recent pension reforms have reduced access to early retirement or removed it completely. The long-term policy of permitting early retirement five years before the statutory retirement age means a 30% reduction in benefits, from an already relatively low level. Reducing this to two or three years would be more in line with that of other countries.

Korea is one of only seven countries within the OECD that applies apply earnings limits to the amount that people can earn while receiving pensions, beyond which pension benefits are reduced. These earnings limits mean that labour income is effectively taxed more, which creates obstacles to retirees working while receiving their earned pension entitlements. Earnings and pension should be treated independently, thereby granting the acquired pension irrespective of current earnings levels.

There are two main reasons for career breaks – childcare and unemployment. For the former, Korea is the only OECD country, among those that provide childcare credits within the pension system, that does not provide credit for the first child. This therefore provides no support to new mothers, despite Korea having the lowest fertility level in the OECD. Credit within the pension system therefore needs to be provided for each child. The credit can either be based on previous earnings or at a flat rate, but should ensure that most workers face limited penalties with their future pension, and ideally the credit period should be extended.

For unemployment, only one year of labour market absence is covered within the pension system, with employees still being liable for 25% of the total contributions. This provides limited protection for future pension levels in comparison to most other OECD countries. The duration of unemployment credit granted to the pension system should be extended. As with childcare the pensionable base can be previous earnings or flat rate or could even gradually decline as the unemployment duration increases, which is a relatively common approach in other countries.

Recommendations to improve public contributory pensions in Korea.

  • Increase NPS contribution rates considerably and as soon as possible. Use additional resources to increase accrual rates in a financially sustainable way and to preserve at least a small reserve fund

  • Extend the contribution period after age 60 such that pension entitlements continue to accrue until at least the statutory retirement age

  • Ensure a gradual convergence of pension rules covering different occupations towards a full integration of all schemes

  • Raise the wage ceiling to contributions substantially

  • Finance some pension redistributive components from the state budget

  • Ensure active participation in the pension system of all eligible individuals, by improving co-ordination with tax authorities to verify income levels for the individually insured and increasing penalties for employers who do not enrol their workers

  • Link the retirement age to life expectancy, reduce the currently 5-year gap between the early and the statutory retirement ages and consider moving faster to age 65

  • Fully permit combining work and pension receipt from the statutory retirement age by removing the earnings ceiling beyond which pensions are reduced

  • Extend the duration of both unemployment and childcare credits and include the first child in the latter.


[8] Choi, K., B. Lim and J. Park (2020), “Evaluation of the Reverse Mortgage Option in Korea: A Long Straddle Perspective”, International Journal of Financial Studies, Vol. 8/3, p. 55, https://doi.org/10.3390/ijfs8030055.

[13] GEPS (2020), Government Employees Pension Service Annual Report 2020, GEPS.

[12] GEPS (2019), Government Employees Pension Service Annual Report 2019, GEPS.

[10] Kim, W. and F. Stewart (2011), “Reform on Pension Fund Governance and Management: The 1998 Reform of Korea National Pension Fund”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 7, OECD Publishing, Paris, https://doi.org/10.1787/5kgj4hqst9xx-en.

[15] Korea Housing-Finance Corporation (2021), https://www.hf.go.kr/ehf/index.do.

[11] NPS (2018), 4th Actuarial Review of National Pension System, National Pension Service, Jeonju (in Korean), https://www.mohw.go.kr/react/policy/policy_bd_vw.jsp?PAR_MENU_ID=06&MENU_ID=06410507&CONT_SEQ=347332&page=1.

[9] NPS (2004), 2004 Annual Report on National Pension Fund Management, National Pension Service Korea, https://fund.nps.or.kr/jsppage/fund/prs_e/prs_e_04.jsp.

[7] OECD (2022), OECD Economic Surveys: Korea 2022, OECD Publishing, Paris, https://doi.org/10.1787/19990707.

[6] OECD (2021), Pensions at a Glance 2021, country profiles, http://oe.cd/pag.

[2] OECD (2021), Pensions at a Glance 2021: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/ca401ebd-en.

[4] OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/b6d3dcfc-en.

[1] OECD (2019), Will future pensioners work for longer and retire on less?, Policy Brief on Pensions, OECD Publishing, Paris, https://www.oecd.org/pensions/public-pensions/OECD-Policy-Brief-Future-Pensioners-2019.pdf.

[14] OECD (2018), Working Better with Age: Korea, Ageing and Employment Policies, OECD Publishing, Paris, https://doi.org/10.1787/9789264208261-en.

[3] OECD (2017), Pensions at a Glance 2017: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/pension_glance-2017-en.

[5] UNESCAP (2016), Income Security for Older Persons in the Republic of Korea, UNESCAP, https://www.unescap.org/resources/income-security-older-persons-republic-korea.


← 1. 2073 is the retirement date for those entering the labour market at age 20 in 2028, from which the accrual rate reaches the long-term low.

← 2. More than half of OECD countries have a higher tax-free allowance and some countries like Hungary and the Slovak Republic do not tax pensions at all.

← 3. This is despite both countries having a 6% penalty for each year of early retirement. This is due to the fact that Japan has no age ceiling for contributions to the pension system before the retirement age; therefore future pension accruals will also be missing, thereby increasing the loss for retiring early.

← 4. Given the age pattern for the career break studied in the chart, the absence of unemployment credits combined with a DC scheme, such as in Chile and Mexico, implies a 13% cut in pension or 87% for the relative pension. For low-earners, whilst the situation in Korea is unchanged at 90% of the full-career case, the OECD average is slightly higher at 96%, reflecting greater protection to those with lower levels of income. In Korea the one-year of unemployment credit is based on past earnings so the proportion of protection is the same across the earnings spectrum, hence no change in the relative pension.

← 5. Conversely, in Ireland and New Zealand, such career breaks are fully cushioned as the mandatory schemes only include flat-rate benefits in these countries.

← 6. In Ireland, the self-employed participate in contribution-based basic schemes on similar terms as employees while the earnings-related schemes are voluntary for all.

← 7. For a couple, the amount was KRW 480 000.

← 8. OECD calculations based on the Survey of Household Finances and Living Conditions, 2014-21.

← 9. For term type, up to 45% of the reverse mortgage payments (loan proceeds) can be withdrawn as a lump sum with an additional 5% paid at the end of the payment term, and the remainder paid monthly over the duration of the term chosen by the homeowner. For the tenure type, the entire mortgage amount, with no lump sum withdrawal, is paid as a monthly pension received for life, for both the homeowner and their spouse and can either be flat rate throughout or be higher for the first ten years and then reduced to 70% of the value. For example, an applicant at age 65 with a home valued at KRW 300 million (USD 270 000) under the tenure method can either chose to receive a monthly payment of KRW 752 000 (23% of net average earnings) for life or KRW 888 000 (27% of net average earnings) for the first ten years and then KRW 622 000 thereafter (Korea Housing-Finance Corporation, 2021[15]).

← 10. A full-time employee at the minimum wage would have an income above 50% of the A value, so this 0.5 A value case is not representative of a full-time employee.

← 11. For example, if the same lump sum were converted into a price-indexed lifetime annuity this would give a replacement rate of 17.6%, less than one-third of the pension that would be paid. For low earners the comparison is even worse as the 17.6% replacement for the lump sum is constant across all earnings levels, whilst the pension replacement rate for low earners is more than five times higher at 91.8%.

← 12. The 1st Actuarial Report, giving a long-term estimate of the financial sustainability of the pension system by the NPS in 2003, accounted for the reduction in target replacement rate from 70% to 60%. It projected that the NPF would be in deficit by 2036 and totally exhausted by 2047. The second of these reviews, in 2008, took account of the 2007 reform which reduced the target replacement rate further to 50% immediately and then to 40% by 2028. The long-term sustainability was therefore improved in that fund deficits would not be reached until 2044 with exhaustion occurring in 2060. There have been no further reforms to the NPS since 2007 so the subsequent actuarial reviews have shown very little variation in their forecasts, mainly being affected by assumptions concerning increasing population ageing, higher participation rates and lower financial returns due to the latest financial crisis.

← 13. Source: National Assembly Budget Office.

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