Korea's pension crisis

Kim, a 58-year-old construction worker, plans to continue working well past 60. Despite contributing to the National Pension Scheme for over 30 years, his expected monthly pension of 1.6 million won falls short of half his current income. “I joined an Individual Retirement Pension (IRP) plan for tax benefits, but since my contributions are minimal, the National Pension will account for the bulk of my post-retirement income,” Kim said. “I have no choice but to keep working.”

With South Korea set to officially enter a "super-aged society" in 2025—when over 20% of the population will be 65 or older—concerns are mounting over the lack of retirement preparedness among the elderly. While retirees in developed nations often rely on robust pensions to support active post-retirement lives and contribute to their economies, Korea’s aging population faces inadequate preparations. This so-called “income cliff” among the elderly poses a growing economic burden on an economy already teetering at 1% growth.

Like many advanced economies, Korea has adopted a “three-tier pension system,” comprising the National Pension, retirement pensions, and private pensions. However, critics argue that structural flaws—such as looming fund depletion and low returns—undermine its effectiveness in guaranteeing sufficient retirement income.

According to the Ministry of Health and Welfare on Thursday, the National Pension Scheme, operating with a contribution rate of 9% and a replacement rate (income replacement ratio) set to decline to 40% by 2028, will start running a deficit in 2041. By 2055, the fund is projected to be fully depleted under the current system. Growing distrust among younger generations regarding the pension’s sustainability has prompted the Yoon Suk Yeol administration to prioritize pension reform as one of its four key reform initiatives. In September, the government proposed increasing the contribution rate to 13% (up four percentage points) and raising the replacement rate to 42%. The proposal also included mandatory enrollment in retirement pensions for employees at larger companies and incentives, such as tax benefits, to encourage participation in private pension plans. However, the impeachment-related political turmoil has stalled the reform agenda. Legislative changes necessary for pension reform remain at an impasse, and discussions, including the establishment of a special pension reform committee, have been pushed to the back burner.

Private pensions, which are meant to supplement the National Pension, are also falling short. As of September 2024, the total retirement pension reserves exceeded 400 trillion won, but 83.2% of these funds remain tied to principal-protected products like savings and insurance, limiting growth potential. With most funds locked in such conservative investments, the average annualized return for retirement pensions over the past decade stood at a mere 2.07% as of the end of 2023. Additionally, only 19% of Koreans were enrolled in private pension plans as of 2022.

Experts stress that institutional improvements, such as introducing fund-based retirement pensions, are essential for the "three-tier pension system" to function effectively. Unlike the current "contract-based" model, where individuals directly manage their investments through private financial institutions, a fund-based system would centralize pension management. In this model, a specialized intermediary organization comprised of investment professionals would oversee the management and operation of retirement funds on behalf of contributors. Nam Jae-woo, a senior researcher at the Korea Capital Market Institute, criticized the status quo: “The current situation, where most funds are tied to principal-protected products, reflects neglect rather than conservative management. Adopting a fund-based retirement pension system would allow for policies like default investment options, improving overall returns.”


김수연기자 syeon@donga.com