Pension Reform in Korea Jae Young LEE Director, Welfare Economic Policy Division Economic Policy Bureau Ministry of Finance and Economy Republic of Korea

Contents 1. Public Pension in Korea( ) 2. Ageing Population and Pension 2. Recent Public Pension Reform( ) 3. Agenda for Future Reform

1. Public Pension in Korea( ) (1) Establishment of the National Pension Scheme(1988) Partially-funded system with a redistributive element : Unsustainable low-contribution, high-benefit structure - Benefits : based equally on the average wage in the economy and individual earnings * replacement rate : 70% for an average worker with 40 years of contribution - Contributions : 3% of individual earnings Coverage : Narrow - limited to regular employees in firms with workers ≥ 10

1. Public Pension in Korea( ) (2) Reform of National Pension Scheme( ) Benefits : down : replacement rate of 70% : replacement rate of 60% Contribution : up : 3% of individual earnings : 6% of individual earnings : 9% of individual earnings Coverage : widened : regular employees in firms with workers ≥ : regular employees in firms with workers ≥ : farmers, fishermen and residents in rural areas : urban self-employed persons and all employees

1. Public Pension in Korea( ) The coverage of the National Pension Scheme Source: National Pension and the Korea National Statistical Office Source: National Pension Service and the Korea National Statistical Office

2. Ageing Population and Pension (1) Population Ageing in Korea Population of the elderly : (’05) 9.1% → (’50) 38.2% Prospect of Population Change by Age

2. Ageing Population and Pension Population Ageing in Korea : one of the World-fastest - Ageing to Super-aged society : only 26 years Population Ageing : Trend and Prospect KORE A FRANCEU.SU.KJAPAN Ageing society Aged Society Super-aged Society Aging -> Aged Aged -> Super-aged

2. Ageing Population and Pension (2) Poverty of the Elderly Severe poverty among households with elderly persons - Relative poverty rate(2000) : households with elderly persons 38.8% >> all households 8.1% * Relative poverty rate : ratio of households with income less than 40 % of the national median income Ensuring adequate income for the elderly becomes social task - Elderly persons living alone or with spouse : 55% vs. Elderly persons living with one of their children 39% (2005) - Elderly persons receiving public pensions : 14% (2005)

2. Ageing Population and Pension (3) Ageing and Sustainability of the National Pension Scheme NPS Finance Prospect(2003) : expected to turn into deficit : expected to be exhausted NPS Finance Prospect

3. Recent Public Pension Reform ( ) (0) Three Problems Problem of Financial Un-sustainability - Low-contribution, high-benefit Pension structure - NPS forecast to be exhausted in Further parametric reform needed Problem of the Uncovered Elderly - Elderly persons receiving public pensions : 14% (2005) - Contributors to NPS among working-age population : 39.9% (2006) Problem of Low Return on Investment by the Pension Fund - Returns on investment of NPS ( ): 6.72% * USA CalPERS 13.4%, Canada CPP 13.87%, Sweden API 12.90%

3. Recent Public Pension Reform ( ) (1) Financial Sustainability : Parametric Reform (2007) A Parametric Reform bill passed in the Assembly(May 2007) - Replacement rate : 60% -> (08) 50% -> (28) 40% * increase of contribution rate from 9% to 15.9% dropped during legislation NPS Finance Prospect after Reform

3. Recent Public Pension Reform ( ) (2) Increase of Pension Coverage : Basic Pension (2007) Coverage - (2008) 60% of the elderly persons ( ≒ 300 million) - (2009) 70% of the elderly persons ( ≒ 363 million) Benefits - (2008) 5% of the average wage ( ≒ $90) - (2028) 10% of the average wage Finance : Tax (Central & Local Governments) - (2008) 2.2 trillion won ( ≒ $2.4 billion) - Central Government 72% + Local Government 28%

3. Recent Public Pension Reform ( ) (3) Reform of Pension Fund Management (A bill to be submitted to the Assembly shortly) Current System - Government-run, non-professional management structure Benchmark Pension Fund : Canada CPPIB - Independence from the government, expertise and accountability of the investment board and management, transparency Main Contents of the Reform Bill - Create an independent pension fund management commission - Set up an professional public pension investment corporation - Establish accountable and transparent governance structure

4. Agenda for Future Reform Sustainability of the Pension Scheme - Parametric vs. Systemic Reform Coverage of the Pension Scheme - Extend the Basic Pension? Pension Fund Management - Divide? Out-source? Privatize?

4. Agenda for Future Reform A Two-Part National Pension Scheme - Basic Pension + scaled-back National Pension Basic Pension - replacement rate : 20% - cost : 6.8% of GDP (tax-financed) Scaled-back National Pension - replacement rate : 20% - contribution rate : 6.45% of earnings (3.5% of GDP)