1. Pension Reform in Korea 2007.10 Jae Young LEE Director, Welfare Economic Policy Division Economic Policy Bureau Ministry of Finance and Economy Republic of Korea

2. Contents 1. Public Pension in Korea(1988-2002) 2. Ageing Population and Pension 2. Recent Public Pension Reform(2003-2007) 3. Agenda for Future Reform

3. 1. Public Pension in Korea(1988-2002) (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

4. 1. Public Pension in Korea(1988-2002) (2) Reform of National Pension Scheme(1988-2002) Benefits : down - 1988 : replacement rate of 70% - 1998 : replacement rate of 60% Contribution : up - 1988 : 3% of individual earnings - 1993 : 6% of individual earnings - 1998 : 9% of individual earnings Coverage : widened - 1998 : regular employees in firms with workers ≥ 10 - 1992 : regular employees in firms with workers ≥ 5 - 1995 : farmers, fishermen and residents in rural areas - 1999 : urban self-employed persons and all employees

5. 1. Public Pension in Korea(1988-2002) 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

6. 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

7. 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 20001864194219291970 Aged Society 20181979201319761994 Super-aged Society 20262020202820212006 Aging -> Aged18115714724 Aged -> Super-aged841154512

8. 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)

9. 2. Ageing Population and Pension (3) Ageing and Sustainability of the National Pension Scheme NPS Finance Prospect(2003) - 2036 : expected to turn into deficit - 2047 : expected to be exhausted NPS Finance Prospect

10. 3. Recent Public Pension Reform (2003-2007) (0) Three Problems Problem of Financial Un-sustainability - Low-contribution, high-benefit Pension structure - NPS forecast to be exhausted in 2047 - 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 (2004-2006): 6.72% * USA CalPERS 13.4%, Canada CPP 13.87%, Sweden API 12.90%

11. 3. Recent Public Pension Reform (2003-2007) (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

12. 3. Recent Public Pension Reform (2003-2007) (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%

13. 3. Recent Public Pension Reform (2003-2007) (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

14. 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?

15. 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)