Academic journal article The Economic and Labour Relations Review : ELRR

Rapid Ageing and Old-Age Income Security in Korea

Academic journal article The Economic and Labour Relations Review : ELRR

Rapid Ageing and Old-Age Income Security in Korea

Article excerpt

1. Introduction

Over the next few decades, Korea is expected to undergo a rapid demographic transition that will make its elderly dependency ratio one of the highest in the world. In the meantime, following rapid economic growth and demographic change, reliance on inter-family transfers for support during old age has given way to formal pension arrangements, mostly mandated by the government.

Publicly mandated old age income security in Korea consists of public pension schemes and retirement allowance programs. The public pension schemes are divided into two groups: one is the Special Occupational Pension Schemes (SOPS) for civil servants, military personnel and private school teachers and employees, and the other is the National Pension System (NPS) for the rest of the population. Legislation has recently been passed that will see the partial conversion of retirement allowances into funded private pensions.

The rapid demographic transition will lead to higher costs associated with the maintenance of current public pension systems. Both the SOPS and NPS have been facing serious problems of financial sustainability arising from a structural imbalance between low contributions and overly generous benefits. The SOPS is already running deficits and depletion of the fund reserves is looming. Although the NPS is still in the start-up phase, it is faced with an overriding challenge of accumulating a huge stock of funds before the reserve begins to shrink from mid-2030. As the NPS has the characteristics of a partially funded system, it is particularly vulnerable during economic downturns and to rapidly ageing populations. Meanwhile, mandatory employer-based, retirement benefits (retirement allowance programs) are effectively unfunded and unregulated.

The design of a pension system which will be sustainable in the long term is an urgent problem for Korea. While existing formal pension schemes are financially unstable and impose a large burden on future taxpayers, the new pension system must be fiscally sustainable and fair to future generations.

The aim of this paper is to examine the recent reform initiatives of public and private pension schemes in Korea. To attain this goal, the paper is structured as follows. The changing social environment and demographic issues facing the public pension schemes are presented in section 2. In section 3 the features of the current Korean pension arrangements are described and the associated economic and financial issues are highlighted. Section 4 summarizes recent reforms and outstanding issues, while the current reform initiatives for both public pensions and retirement allowances are presented in section 5. Section 6 concludes.

2. Overview of the Social Environment in Korea: Changes in Population and Family Structure

Since the 1960s, Korea has experienced rapid social change, characterized by the emergence of the nuclear family and the dissolution of the traditional extended family system. These changes have resulted from high economic growth, and the extension of life expectancy due higher incomes. 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. An implication of the increased labor market participation by women is a reduction in the number of traditional carers who used to look after the old, while the number of elderly has increased significantly. These factors have resulted in substantial changes in family structure.

Changes in Population Structure

The population growth rate has been declining since the 1960s thanks to the successful implementation of family planning, an increased income level, improved education and better health. Since the 1980s, the total fertility rate has fallen so low that even sustaining the population at the current level has been threatened. The total fertility rate has fallen from 6 live births in 1960s to 2 in 1980s, and 1. …

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