The National Report : Korea
National Report
Korea
Sukmyung Yun
Head of Research Coordination
National Pension Corporation of Korea
E-mail: smy1985@ npc.or.kr
International Society for Labour and Social Security Law
8th Asian Regional Congress
October 31~ November 3, 2005 - Taipei, Taiwan
I. Introduction
With rapid economic and demographic growths after the Second World War, many countries around the world had shifted to a pay-as-you-go basis in the pension system they had in place. But ever since the dawn of the 1970s they have been, as a diverse range of factors inimical to pension finance emerged with an increase in life expectancy and a drop in fertility, increasingly shifting their pension schemes from pay-as-you-go to a partially funded system or making efforts to stabilize pension finances with a multi-pillar income protection approach.
The proportion and the financial status of public pension in the whole post-retirement income protection system vary widely from country to country. The UK, in particular, has a small public pension compared to other advanced countries and the finance of its public pension, with its demographic process in full swing, is expected to be healthy for a long time to come. As to France and Germany, on the other hand, where public pension takes a much bigger share, financial woes would be inevitable from a long-term perspective if their current systems remain as they are now, and therefore are due to move in the direction of shifting their pension to a partially funded system. Thus, even pension schemes in a group of advanced countries can be markedly different depending on what philosophy they have been managed.
Meanwhile, as for Korea, a country whose population aging is proceeding at an almost unprecedented past, the prospect of pension finance, which is attributable to such external factors as decreases in fertility and increases in average life expectancy, is grimmer than any other countries, especially when there is no easy road to public agreement on necessary pension reform. Different interest groups have been expressing contentions since the announcement of the National Pension Reform Plan. In general, labor groups, civic groups, and those who pursue their vocation in the field of social welfare prefer to retain the existing National Pension. The employer, government ministries responsible for economics and those working in the economics field prefer something much more sweeping than the National Pension Reform Plan. The former are criticizing that the neo-liberalist proposals of the OECD and other international organizations are ignoring the intent of public pension and overemphasizing the importance of the need for stabilizing pension finance. The latter group, on the other hand, argues that, with an anticipated increase in pension expenditure in a rapidly aging society life Korea, the government’s pension reform plan would impose unbearable burden on the employer and the government itself and that, in order to streamline the National Pension, more efforts are urgently required.
Even within the group that sees pension reform as necessary, there are two opposing views, one expressing the need for paradigmatic reform along with an introduction of tax-financed basic pension and other proposing stepwise parametric reform. This makes it more difficult to reach a public consensus.
This paper argues that, in consideration of current circumstances, parametric reform would be more suitable that paradigmatic reform for Korea. In the process, rationale for such an argument will be laid out, and the pros and cons of several reform alternatives will be examined in terms of coverage, benefit level, and sustainability.
II. Overview of Social Environment in Korea-Changes in Population
and Family Structure
Since the 1960s, Korea has experienced rapid social changes which are characterized by the emergence of the nuclear family and the dissolution of the traditional extended family system due to high economic growth, and the extension of life expectancy due to the increasing income level. At the same time, the total fertility rate has been declining drastically, due largely to the increasing participation of women in the ever-growing labor market. Consequently, increased labor market participation by women reduced the traditional housekeepers who used to look after elders while the number of elderly has increased significantly, resulting in substantial changes in family structure.
1. Changes in Population Structure
A. Slowdown in Population Growth
The population growth rate has been declining since the 1960s thanks to the successful implementation of family planning, increased income level, improved education and better health. Starting from the 1980s, the total fertility rate fell so low that even sustaining population at the current level has been threatened. The slowdown in population growth is well demonstrated by the drastic decline in the total fertility rate. This has fallen from 6 live births in 1960s to 2 in 1980s, and 1.48 births in 1998. This drop in 1998 was attributed to the economic downturn in the wake of the financial crisis and its negative impact on family planning. Recently, the fertility rate reached a record-low level of 1.17 in 2002. Korea's total fertility rate is currently lower than those of most advanced countries. The fertility drop in Korea is accompanied by rising marriage and childbearing ages. A very important change coincidental with the fertility drop is the rapid increase in the educational level of Korean women. Accordingly, this change in childbirth timing alone can explain a significant part of the drop in the total fertility rate. These facts suggest that policy implementations directed at increasing fertility would not be very significant in the mid-term.
Table 1. Trends of Total Fertility Rate
Year / 1960 / 1966 / 1970 / 1975 / 1980 / 1985 / 1990 / 1995 / 1998 / 2000 / 2002 / 2003T.F.R / 6.00 / 5.30 / 4.51 / 3.42 / 2.73 / 1.70 / 1.58 / 1.64 / 1.48 / 1.47 / 1.17 / 1.19
Source: National Statistical Office, 2004.
B. Increase in Aged Population
The number of elderly aged over 65 has increased rapidly from 0.72 million in 1960 to 3.7 million in 2002, as shown in Table 2. The population projection by NSO shows that the number of elderly aged over 65 will be well over 11 million in 2030. The dependency ratio, which is the ratio of the number of elderly over 65 to the number of economically active population (aged 18 to 64), which stood at 11.7% in 2002, is projected to increase to 37.3% in 2030 and further to 75.2% in 2070, respectively.
Table 2. Long-term Projection of population and dependency ratio
Year / Number of population / Dependency RatioTotal / Under 18 / 18-64 (A) / Over 65 (B) / (B)/(A)
2002 / 47,640 / 11,704 / 32,164 / 3,772 / 11.7
2005 / 48,461 / 11,373 / 32,722 / 4,366 / 13.3
2010 / 49,594 / 10,654 / 33,639 / 5,302 / 15.8
2020 / 50,650 / 8,624 / 34,358 / 7,667 / 22.3
2030 / 50,296 / 7,577 / 31,116 / 11,604 / 37.3
2040 / 48,204 / 6,754 / 26,917 / 14,533 / 54.0
2050 / 44,337 / 5,711 / 23,355 / 15,271 / 65.4
2060 / 39,599 / 4,992 / 20,277 / 14,330 / 70.7
2070 / 34,961 / 4,549 / 17,356 / 13,056 / 75.2
(Unit : thousand persons, %)
Source: National Statistical Office(2003) and National Pension Research Institute(2003).
Figure 1. Long-term Projection of population and dependency ratio
The United Nations defines an " ageing society" as a society in which the proportion of elderly over 65 exceeds 7%, and the "aged society" as a society in which the proportion of elderly population exceeds 14%. If we apply the definitions of the U.N., Korea has become an aging society in 2000 when the share of elderly registered 7.13% and will become an aged society in the 2019 when this ratio exceeds 14%.
Table 3. Transition from Aging to Aged Society: Experiences of Advanced Countries and Korean Projections
Japan / U.S / U.K / France / Germany / Sweden / Korea. S.Aging Society / 1970 / 1942 / 1929 / 1864 / 1932 / 1887 / 2000
Aged Society / 1994 / 2013 / 1976 / 1979 / 1972 / 1972 / 2019
Years Taken / 24 / 71 / 47 / 115 / 40 / 85 / 19
Source: OECD Economic Surveys: Korea, 2001. In case of Korea, modified as the most recent estimates of NSO.
The ageing process of a population, a common phenomenon, was experienced by all industrial countries during the process of rapid economic development after the Industrial Revolution. The problem being experienced in Korea with the ageing population is that, unlike the industrial countries, where the ageing of population has been occurring rather gradually over some time, the pace experienced by Korea has been extraordinarily fast. It took 115 years for France to become an aged society (old age share of 14%) from an aging society (with a share of elderly of 7%) while the same process took 85 years for Sweden, and 47 years for the United Kingdom, respectively. In the case of Korea, this transformation process is expected to take only 19 years, if the current pace of ageing continues.[1]
2. Changes in Traditional Family Structure and Function
A. Changes in Family Structure
With the economic development launched in the 1960s, there has been a large population inflow to urban centers from rural areas. The traditional extended family structure in rural areas crumbled in the midst of a large outflow of younger people to cities where they formed small or nuclear families, as occurred during the industrialization progresses.
The share of extended families (covering 3 generations in a household) has rapidly declined from 23.2% in 1970 to 11.1% in 1995 while the share of core families increased significantly from 6.8% in 1970 to 13% in 1995. The number of family members also declined from 5.2 in 1970 to 3.3 in the mid-1990s.
B. Changes in Family Function
Traditionally, Korea had an informal social protection system for the elderly who were supported by the members of the extended families. The eldest son was usually responsible for looking after the parents, and the family property was usually inherited through this line so that a kind of old age protection system was operated during the traditional society. As the economy grew and the extended family system started to crumble, young people left for cities and women started to work, resulting in an end to this informal protection system.
Since the Korean economy has been maturing and is now linked to the fluctuations of the world economy, it has also been subject to fluctuations of the world economy and has become vulnerable to the serious economic downturn caused by the recent financial crisis. This has also changed the traditional lifetime employment system and mass unemployment has become a serious social issue. Under these social and economic changes, the family-centered social protection system could no longer function.
Ⅲ. Current State and Problems of the Old-Age Income Security System
1. Public Pension Scheme
The first public pension scheme in Korea was the Civil Service Pension Scheme which was launched in 1960. This was followed by the Military Pension Scheme in 1963, the Private School Teachers Pension Scheme founded in 1975, and the National Pension System (NPS) introduced in 1988. The NPS, which covered all workplaces employing more than 10 workers initially, extended its coverage gradually over the years and, starting in April 1999, a new era of a universal pension system was initiated when NPS coverage was extended even to the self-employed in urban areas.
The development of old age protection within the short time span of 40 years since 1960 when the first Civil Service Pension was launched, was a remarkable achievement in Korea's social development. Despite the impressive development, however, the public pension system in Korea is facing a serious challenge due to its financial sustainability problem which is attributed to the inherent structural weakness of the system in which pension payment is overly generous compared to contribution to pension.
Table 4. Current Korean Pension System, as of 2003
- still poorly developed market
Retirement
Allowance
Scheme / °Mandatory(since 1961) for firms with 5 or more
Workers
°Minimum 1
Month salary per 1 year service(=8.3%) / - / °Occupational
pension
(1960 for S.C., 1975
for P.S.T)
°Contribution Rate
= 17%
(8.5% = employee,
8.5% = government/
Corporate)
°Target R.R. = 76%
(for 33 year
maximum
contribution)
National Pension Scheme / °National pension scheme(1988): partial funding DB system; Mandatory
°Pension benefit = Contribution-based, differentiated by income-class
(redistributed portion + earnings-related portion), starting at age 60
°Contribution Rate = 9.0%(4.5% = employer, 4.5% on employee)(8% for the Self-employed. Planned to reach 9% by 2005 )
°T.R.R. = 60%(for 40 years contribution, average wage worker)
Pillar Group / Employed workers / Self-employed
(Including
farmers) / Civil Servants
(+Military)/ Teachers
Source: Phang, 2002.
A. Civil Servant Pension[2]
Launched in January 1960 as the first public pension scheme in Korea, the Civil Servant Pension Scheme provided its coverage to employees of the central and local governments, public school teachers and employees, members of the judiciary branch and the Office of the Public Prosecutors, and police officers. Its participants grew rapidly from some 230,000 in 1960 to about 967,000 at present. The financial resources of the Pension Scheme were the contributions made by its participants and employers (central and local governments). Though the contribution rates have been gradually adjusted upward from 2.3% in 1960, 5.5% in 1970, 6.5% in 1996, 7.5% in 1999 and to 8.5% in 2001 (total contribution of 17%), the current Civil Servant Pension Scheme has an inherent flaw in that pension payments are based on the weighted average of the last three years’ salary of participants. In this respect, it is a typical pension system designed under the premise of "low contribution, high pension" basis and its financial sustainability cannot be attained so far as the system deficiency remains unreformed.
An early sign of financial instability of the Civil Servant Pension Scheme surfaced in 1995 when it ran into deficit for the first time in its history. The problem was aggravated again in 1998, due to the large number of civil servants who left the service as a consequence of structural reforms undertaken in the wake of the financial crisis. In sum, the Civil Servant Pension Scheme is facing serious financial instability.