Research Monographs
A Study of Ways to Strengthen Old-age Income Protection
- Author
Kim Sangho
- Publication Date
2015
- Pages
- Series No.
- Language
This study examined Korea’s old-age income protection system and discussed what should be done to improve it in the future. We suggest as follows. First, raising the income replacement rate of the National Pension outright is hardly a productive approach, as there are a large number of small business owners and precarious workers who still remain outside its coverage. An increase in the income replacement rate will be held justifiable only if supported by workable ways to substantially reduce the uncovered population and accompanied by an increase in the contribution rate that would add to the actuarial soundness of the National Pension.
Second, ever since the introduction of the National Pension, the base monthly earnings cutoff level was left unchanged until March 1993 at KRW 2 million; an earnings cutoff of KRW 3.6 million was in place during the period between April 1995 and June 2010. Even afterward, the cutoff earnings level increased much more slowly than the rise in average income. If anything, however, an immediate large-scale increase in the cutoff level will likely negatively affect the financing of the National Pension. The present cutoff needs to be raised in a stepwise fashion over time until it reaches two and a half times as high as the average earnings level.
Third, the Durunuri Social Insurance Subsidy Program as it stands has been less than effective in brining those outside the National Pension into it. This program needs to be strengthened.
Fourth, there is a need for expanding credit programs. The eligible period for the yet-to-be-implemented unemployment credit program should be increased and the ceiling of eligible income should also be raised. Likewise, the eligibility period for the military service credit program should be increased steadily over time from current six months. Also, the eligible income level for this program will need to be raised to an amount equivalent to the average base earnings.
In addition, this study examined the feasibility of introducing a private pension program― one comparable to Germany’s Riester Scheme―for supplementary pension provision. After 15 years since its inception, the Riester Scheme has not been as effective as intended as a means of supplementary old-age income security. As of 2015, only as little as 42 percent of eligible Germans were participating in the program, with a still lower participation rate among low-income groups. The cost-benefit ratio has not been, and is unlikely to be, as high as expected in the early years of the pension program. The poor administrative performance regarding Reister pension products is yet another problematic issue. In fine, despite the enormous amount of general account subsidies and the generous tax treatments attached to it, the Reister Scheme is not an option for Korea. A Reister-like private pension program is unlikely to function as an effective means of strengthening old-age income protection in a country like Korea where there is a large population of precarious workers and self-employed individuals. The cost of introducing a Reister-like private pension program can instead be used to support more of these financially-pinched individuals to participate in the National Pension.
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A Study of Ways to Strengthen Old-age Income Protection(KOR).pdf