KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Health Insurance Expenditure Growth: Driving Factors and Policy Implications

As financing tools such as higher premiums and government subsidies are increasingly unsustainable, national health insurance system faces growing pressure to optimize spending. Empirical analysis of health insurance expenditure drivers identifies price increases as the dominant factor. In particular, rising service prices in local primary care clinics rather than utilization rates are disproportionately contributing to overall expenditure growth. For efficient management of health insurance resources, policy efforts should focus on strengthening the primary care function of local clinics by reforming the current fee-for-service payment model, while also institutionalizing a robust expenditure review framework.

- Despite a sharp rise in healthcare expenditure, Korea’s health insurance system lacks mechanisms to control spending.

- Premium increases and subsidy expansions are becoming unsustainable as financing tools, underlining the need for effective expenditure control.

- Effective expenditure management requires understanding the drivers of health insurance spending.

- From 2009 to 2019, price accounted for 76.7% of the increase in health insurance expenditure, with quantity and demographics contributing 14.6% and 8.6%, respectively.

- The price contribution to health insurance expenditure growth has increased over time.

- While the demographic contribution remains significant, it has declined.

- In 2019, the contribution of price in outpatient services accounted for 38.7% of health insurance expenditure growth, making it the largest contributor.

- As inpatient utilization slows and price gains greater influence, the inpatient quantity contribution to health insurance expenditure growth has declined.

- In 2019, price in primary care clinics accounted for 24.9% of the increase in health insurance expenditure―the highest among all institution types.

- Quantity contributions have declined most noticeably in primary care clinics and tertiary hospitals.

- Among individuals aged 65+, demographic change was the primary contributor to health insurance expenditure growth, while the influence of price has expanded in recent years.

- Among the young-old population (65-74), a decline in quantity contribution has moderated the growth of health insurance
expenditure.

- For those aged 85+, the demographic and quantity factors remain the primary contributors to health insurance expenditure growth.

- The decline in healthcare utilization among the young-old population and the gradual slowdown in health insurance expenditure growth suggest the possibility of healthy aging.

- Managing health insurance expenditure requires exploring ways to supplement the current fee-for-service payment system.

- Supplementing the fee for-service model is also necessary to strengthen the primary care role of local clinics.

- Proactive investment to promote health among the young-old population is required.

- For those aged 85+, management strategies for end-of-life care, including the use of life-sustaining treatments, are needed.

- A formal evaluation framework for health insurance expenditure should be established to support fiscal management strategies.

Summary

Policy Study KOR Decomposing Health Care Expenditure Growth in Korea

This paper analyzes healthcare expenditure growth in Korea using National Health Insurance Claims data from 2009 to 2019. Healthcare expenditure growth is decomposed into three components at the disease level: service utilization growth, service price growth and demographic transition.

The decomposition shows that growth in prices is the primary driver of healthcare expenditure growth since 2013 at the aggregate level. The main driver has shifted from service utilization growth towards service prices growth. The contribution of demographic shift remains stable over the period, however the contribution pattern varies across age group, type of services and suppliers.

Decomposition of healthcare expenditure of elderly shows different pattern compared to aggregate level decomposition. Demographic shift is the main driver of healthcare expenditure growth among elderly. The contribution of service utilization decreased and suggests possible healthy aging.

Summary

KDI FOCUS Reforming the Basic Pension Eligibility Threshold

South Korea’s Basic Pension, which currently covers 70% of its older adults, does not reflect the declining elderly poverty rate as their income and asset levels rise. To ease fiscal burdens while effectively addressing elderly poverty, its eligibility threshold should shift from a fixed share of older adults to one tied to the national median income, better targeting vulnerable older adults for support. In the long term, integrating the Basic Pension with the National Basic Livelihood Security System to establish an old-age minimum income guarantee warrants consideration.

- Currently, the Basic Pension eligibility threshold sets the bottom 70% of recognized income among older adults as recipients, failing to adequately reflect their improved financial conditions.

- In 2015, the Basic Pension eligibility threshold was 50% of the national median income, but as the financial conditions of older adults have improved, it has risen to nearly match the median income by 2025.

- This study examines examines shifting the eligibility threshold from the bottom 70% of older adults to a fixed percentage of the national median income.

- Within the elderly population, more recent birth cohorts have shown improvements in poverty levels.

- The National Pension also shows higher receipt rates and benefit amounts among later cohorts, which is expected to contribute to a decline in future elderly poverty rates.

- Considering these trends, the elderly poverty rate is expected to maintain its decline.

- The national median income (NMI) is widely used as a criterion for various public assistance programs, including the National Basic Livelihood Security System, due to its representativeness.

- This study estimates the fiscal impact of the last two scenarios: adjusting the eligibility threshold for older adults with recognized income at or below 100% of the NMI and gradually lowering it from 100% to 50% of the NMI.

- In the NMI 100% and NMI 100%→50% scenarios, the share of Basic Pension recipients is projected to decrease to 57% and 37% of the 65+ population, respectively, by 2070.

- These scenarios are projected to reduce fiscal expenditure by approximately 19% and 47%, respectively, compared to the current (baseline) trajectory by 2070.

- Linking the eligibility threshold to the NMI enables more efficient poverty alleviation among low-income older adults by utilizing fiscal savings to raise the base pension amount.

- The Basic Pension eligibility threshold should be set at 100% of the NMI and gradually adjusted to 50%, progressively narrowing the recipient base from broad social coverage to older adults in poverty.

- A unified public assistance system for older adults, integrating the National Basic Livelihood Security System and the Basic Pension, should be established in the long term.

- However, it is advisable to gradually increase the Basic Pension's base amount while carefully assessing its impact on National Pension contribution incentives.

Summary

Research Monograph KOR Research on Structural Reforms to Enhance Sustainability of the Public Pension System

This study aims to explore structural reform measures for South Korea’s national pension scheme that can ensure both fiscal sustainability and intergenerational equity. Additionally, it seeks to redefine the basic pension system to guarantee an adequate level of retirement income. To achieve these objectives, the paper integrates fiscal projections, based on a new fiscal forecasting model, with analysis from an overlapping generations (OLG) model. Furthermore, it addresses legal issues related to pension reform and examines cases from major countries where social consensus was achieved during the reform process. The paper also discusses the introduction of the Guarantee Pension and various issues facing public pension systems in Korea.

Chapter 2. Reform Measures and Projections for the National Pension System

This chapter examines reform measures for the national pension system and analyzes their fiscal implications. Since its introduction in 1988, the national pension has undergone several reforms, adjusting both the contribution rate and the income replacement rate. However, earlier reforms seem inadequate to secure long-term fiscal sustainability. Therefore, this research has developed a projection model based on models from the National Pension Research Institute and the National Assembly Budget Office to estimate the current financial situation.

The fiscal projection model estimates the revenues and expenditures of the national pension using demographic forecasts, macroeconomic outlooks, and policy variables. According to the projections, its surplus, which stood at 72.1 trillion KRW in 2023, is expected to turn into a deficit by 2040 and further expand to a deficit of 1,005.2 trillion KRW by 2100. Consequently, the pension fund, which was 1,015.8 trillion KRW in 2023, is projected to reach a peak of 1,972.0 trillion KRW in 2039, after which it will gradually decrease to depletion by 2054.

To enhance the sustainability of the national pension, a scenario analysis is conducted, which suggest that raising the contribution rate from 9% to 12% would deplete the fund by 2060. An increase to 15% would extend solvency to 2068, while a rate of 18% would last until 2079. These findings indicate that even with a substantial and challenging increase in contribution rates, the current defined benefit (DB) scheme―which guarantees a benefit ratio over 2 regardless of contributions―would makes it difficult to sustain the fund throughout the projection period. This highlights the challenge of securing intergenerational equity and maintaining the pension fund's solvency solely through contribution rate increases under the current pension structure, which may face resistance from younger generations.

In response, this research proposes a structural reform of the national pension scheme by introducing a reformed defined contribution (DC) system called the "New Pension," while referring to the pre-reform DB system as the "Old Pension." The shortfall in benefits under the Old Pension would be covered by the government budget, allowing all generations to receive at least their principal contributions back (expected benefit ratio of 1).

The proposed DC New Pension would operate as a Cohort Collective Defined Contribution pension system, where individuals within their cohort participate in an insurance scheme to receive a pension benefit amount until death. To this end, a model has been developed to project revenues, expenditures, balance, and reserves under this system. The results indicate that under the cohort-based DC scheme, the pension fund would not be depleted, even with declining birth rates or extended projection periods, as benefits are paid only from the accumulated contributions and investment returns.

However, since the Old Pension inevitably leads to a fiscal deficit, the study also calculates the scale of this deficit. While various methods exist to measure the shortfall of public pensions, this study aligns with the logic of the Old Pension by calculating the benefits corresponding only to contributions made by current beneficiaries and active contributors (closed group method without future accruals). The financial deficit for contributions made up to 2023 is estimated at 609 trillion KRW (in 2023 present value), but if contributions continue until 2028, this deficit is projected to rise by an additional 260 trillion KRW, bringing the total shortall to 869 trillion KRW. This emphasizes the need to implement pension reforms as early as possible to mitigate the fiscal burden on the government budget from the shortfall in the Old Pension fund.

Chapter 3. Reform Measures and Projections for the Basic Pension

This section analyzes the proposed reform measures for the basic pension system and their fiscal implications. Given the high rate of elderly poverty and the substantial coverage gaps in the national pension, this study examines long-term fiscal projections for the basic pension to ensure its sustainability and enhance its effectiveness in reducing poverty. Various reform scenarios are assessed in the context of these projections to guide future policy decisions.

South Korea has one of the highest elderly poverty rates among OECD countries, largely due to the relatively recent introduction of the national pension and the fact that many older adults were unable to enroll. To address this issue, the Basic Old-Age Pension was introduced in 2008 and later restructured into the basic pension system in 2014. Currently, the basic pension provides up to approximately 333,000 KRW per month as of 2023, targeting the bottom 70% of the elderly based on their recognized income.

The current basic pension system operates on a goal coverage rate, distributing pensions to 70% of older adults. However, as the population ages and the standard pension amount increases, the fiscal pressure on the system intensifies. At the same time, as the national pension benefits increase for new retirees and economic conditions improve, the income threshold for basic pension eligibility has been rising annually. Recently, this has resulted in individuals with recognized incomes approaching 100% of the median income qualifying for the basic pension benefits. Consequently, policy discussions have emerged around improving the poverty reduction effect of the basic pension by tightening eligibility criteria, reducing the number of beneficiaries, and increasing the standard pension amount.

In this context, the study conducts fiscal projections for various reform scenarios currently under consideration for the basic pension. One scenario, proposed by Yun Seok-Myung (2023), involves fixing the eligibility threshold at its current level and indexing it to inflation. To estimate the impact of this selective reform measure on the number of beneficiaries, the study projects changes in the distribution of recognized income among future elderly populations using data from the 2014-2021 Fiscal Panel. The projections assume that the current trend in recognized income persists through 2070. The estimated distribution changes are then applied to the basic pension fiscal projection model developed by Shin Kyung-Hye and Kim Hyeong-Soo (2021) to perform the fiscal projections.

The fiscal projections reveal that maintaining the current system would result in total cumulative expenditures of approximately 3,143 trillion KRW between 2023 and 2070. In contrast, a universal expansion scenario, which increases coverage from 70% to 100% of the elderly population and raises the standard pension amount from the inflation-adjusted 333,000 KRW to 400,000 KRW from 2024 onward, would result in total cumulative expenditures of approximately 5,510 trillion KRW over the same period, which is about 75% higher than maintaining the current system. However, under the targeted improvement scenario, where the eligibility threshold is fixed at the 2023 level and indexed to inflation, the proportion of beneficiaries would gradually decrease from 70% to 23% of the elderly population each year. Even with an increase in the standard pension amount to 400,000 KRW from 2024, total expenditure would amount to 2,012 trillion KRW, a reduction of approximately 36% compared to the current system. Notably, the savings generated from reduced expenditures could increase the standard pension amount to 570,000 KRW by 2070.

It is crucial to consider the basic pension reform in conjunction with the national pension system. As the population ages and the national pension system matures, the basic pension should aim to enhance fiscal sustainability and effectiveness in poverty reduction by making eligibility criteria more targeted and increasing the standard pension amount. To achieve these objectives, the national pension must continue to fulfill its role as a public retirement income security system, while further development of the private pension system is necessary to strengthen income security provided by a multi-pillar approach. Ultimately, the basic pension could prioritize supporting the income of relatively economically disadvantaged elderly individuals, while the national pension and private pensions provide income security for those in relatively better economic conditions.

Chapter 4. Analysis of a DC-Type National Pension System Using an Overlapping Generations Model

This chapter analyzes how different age groups and income classes respond to various pension systems and economic environments by employing a heterogeneous agent overlapping generations (OLG) model within a general equilibrium framework. Unlike the financial projection model discussed in the previous chapter―which treats each gender×age×subscription period group as a homogeneous entity and does not account for endogenous changes in macroeconomic variables such as interest rates and wages―this model allows for a deeper and more nuanced analysis.

This study assumes the population structure of 2070 to examine the potential issues that may arise if the defined benefit (DB) pension system is maintained and to compare it with the responses of various age and income groups under a reformed defined contribution (DC) pension system.

In a population structure characterized by advanced aging like that of 2070, the DB pension system would require an increase in the contribution rate from 9% to 18%, yet still necessitate government support, estimated to be as high as 8.8% of GDP. In contrast, transitioning to a DC pension system would significantly reduce the government's fiscal burden and enhance the sustainability of the national pension fund. While overall production and the average living standards of the working-age population would improve under the DC system, the lower income replacement rate might exacerbate disparities. The DC system makes it more challenging to secure adequate retirement income, which could potentially widen the gap in income security between age groups compared to the DB system.

Specifically, in a DC pension system, households are likely to increase savings in preparation for retirement, leading to lower interest rates and higher wage rates, potentially worsening inequality between retirees and the working-age population. To address this, a mixed approach that uses part of the government financial support for the DB system as a supplementary support for the DC framework could be considered, providing economic benefits to both working and retired age groups. When considering a mixed approach, the DC system generally results in higher total production and post-tax income. Additionally, if the fund's rate of return exceeds the nominal growth rate, the pay-as-you-go (PAYG) pension system may become inefficient in the long term, making a DC system with government support potentially more efficient than a DB system.

Chapter 5. Directions for Public Pension System Reform

This chapter examines the legal issues surrounding national pension reforms and analyzes international cases of social consensus achieved during pension reforms in major countries. It also assesses the validity of structural reform measures for public pensions and explores the potential for restructuring the basic pension and introducing supplementary pensions to address the shortcomings of the current system. Finally, the chapter discusses issues related to South Korea’s public pension systems.

Reforming the national pension inevitably requires legislative amendments in line with constitutional principles, such as property rights, the principle of legitimate expectation, and the principle of proportionality. Legal reviews serve as an important reference, particularly Constitutional Court rulings on mandatory pension enrollment and the legality of premium collection. Adjustments to the contribution rate and income replacement rate are key measures for ensuring the financial sustainability of the national pension. While these adjustments may infringe on property rights, legislative actions that minimize the breach of trust and adhere to the principle of proportionality could be permissible within the constitutional framework.

Ideally, pension reform is achieved through broad social consensus, with active involvement from stakeholders to adjust and align various interests toward a collective agreement. However, South Korea may be ill-suited for a social dialogue-based model like Finland’s or a political consensus model like Sweden’s. The country’s low unionization rate, the absence of representative organizations for self-employed and vulnerable workers, the weak tradition of social dialogue in institutions like the Economic and Social Development Commission, and the adversarial nature of the country's two-party political system all pose challenges.

Given these challenges, the government-led consultative approach, as observed in countries like Germany, the UK, and Japan, may offer a more effective pathway for pension reform in South Korea. What is recommended in this paper is the establishment of a Pension Reform Committee composed of a small number of experts, which would be instrumental in objectively analyzing the situation and proposing directions and principles for reform, for the government to consider adopting.

The current DB pension system faces challenges in improving its fiscal sustainability solely through parametric adjustments, such as increasing contribution rates, lowering income replacement rates, or adjusting the pensionable age. These efforts are constrained by optimistic demographic assumptions underpinning policy decisions. Therefore, it is necessary to explore strategies to address potential issues from introducing a funded DC system, including investment return risks, mortality and wage growth projection errors, and income redistribution concerns. Additionally, reforms should prioritize securing retirement income adequacy.

Furthermore, the chapter discusses restructuring the basic pension and introducing the Guarantee Pension. The restructuring of the basic pension aims to protect individuals who fall outside the coverage of the national pension system, with a focus on strengthening retirement security for low-income groups. Drawing lessons from Finland and Sweden, which operate selective basic pension systems, and Canada, which has a universal system, the chapter explores the future direction of South Korea’s basic pension. South Korea should design a system that, like Finland and Sweden, targets a more limited group of beneficiaries for basic and supplementary pensions to ensure minimum retirement income for low-income seniors.

Lastly, the chapter briefly discusses proposals to enhance the national pension system, including increasing National Pension contribution rates, extending the mandatory enrollment period, raising the ceiling on standard monthly income, addressing the issue of income gaps caused by extending the pensionable age, and exploring integration options to improve equity between the national pension and occupational pensions, such as the Government Employees Pension.

Summary

Policy Study KOR A Study on Elderly Poverty: Focusing on Income and Consumption

This study investigates elderly poverty in South Korea by incorporating both consumption and income to provide a comprehensive assessment of the economic status of the elderly population. By examining these two factors, the study aims to identify vulnerable groups experiencing financial difficulties across multiple dimensions. The findings underscore the variability within income poverty among older adults, highlighting notable differences based on asset holdings. Accounting for both income and consumption allows a more nuanced understanding of elderly poverty, revealing vulnerable groups facing economic hardships in both dimensions. Furthermore, elderly poverty is examined across generations, showing that its high rate in Korea primarily stems from pre-1950s cohorts, who benefited less from rapid economic growth and pension schemes. Consequently, effective poverty alleviation strategies should target the older and poorer demographic relatively left out of economic growth and pension programs. Restructuring the Basic Pension to offer substantial support to vulnerable groups, while excluding high-asset but low-income individuals, can enhance the system’s sustainability and effectiveness in poverty alleviation.

Summary

Research Monograph KOR Who is the Middle Class in Korea?

This study delves into significant discrepancies between the objective and subjective middle classes in Korea, potentially prompting a diverse range of grievances from different economic groups in middle-class discourse. It emphasizes the necessity of examining the multi-layered nature of the so-called "subjective middle class" and its impact on the discourse, together with the causes of such discrepancies and the various challenges that may arise.

The study employs an independent survey to gauge Koreans' class perceptions through two web-based panel surveys. The first survey, conducted in May 2023, queries participants on their objective income and asset levels, subjective class affiliation, satisfaction with living standards and prospects for upward mobility, perceptions of income distribution and inequality, and views on socioeconomic policies. It aims to analyze whether a systematic downward bias exists in self-assessment of one's position in income distribution, patterns of bias and their causes, and potential distortions such bias can cause in policy attitudes.

The subsequent survey, conducted in September 2023, incorporates an experimental component to observe the effects of information on social perception and policy attitudes. It identifies participants' objective class positions using data from the first survey and then shares this information with them. By randomly assigning participants to two groups and providing exact class standings on income distribution to only one group, this study enables an empirical analysis of differences in attitudes toward various social policies, including middle-class awareness and support for redistribution policies, between the feedback-receiving group (treatment group) and the group without feedback (non-treatment group).

The empirical analysis in this research draws from these surveys, with Chapters 2 and 3 based on the first survey (N=3,434) and Chapters 4 and 5 on the second (N=2,000). This report is organized as follows. Chapter 1 presents the necessity and direction of middle-class research, focusing on the concept of the middle class and discussions surrounding the middle-class crisis. Chapter 2 reviews previous studies on objective-subjective class inconsistency, conducts international comparisons using available data, and explores the determinants of subjective class consciousness among Koreans. Chapter 3 compares perceptions of class inequality and policy attitudes on various issues by reclassifying the category of the "socio-economic class" in consideration of the multi-layered nature of the middle class in Korea. Chapter 4 examines the changes after correcting perception biases through objective class information based on the experimentally designed results of the second survey. Chapter 5 assesses the varied cognitive structures and policy preferences within the multi-layered structure of the Korean middle class and examines whether this may lead to policy distortion in the context of discussions on the privileged middle class or elite hereditary succession. Finally, Chapter 6 summarizes the findings and discusses their implications.

Summary

Policy Study KOR A Study on Job Displacement of Middle-Aged Male Workers During Economic Crisis in Korea

This study explores long-term consequences of unexpected job displacement among middle-aged male workers during the 1997 Asian Financial Crisis in Korea. Utilizing datasets from the Korean Labor and Income Panel Study (KLIPS) and Korean Longitudinal Study of Aging (KLoSA), the research examines this cohort's work trajectories, socioeconomic status, and health implications. The study further investigates the intergenerational impacts of job displacement, with a spotlight on education expenditure, education attainment, and labor market outcomes of the children of the affected workers.

The findings reveal that these workers could not regain their pre-crisis employment levels, and their job quality declined due to repeated cycles of unemployment and reemployment. This trend shortened their active years in the workforce, leading to decreased pension contributions and reduced income levels in their later years. Moreover, job displacement adversely influenced their mental well-being, with a marked increase in depression rates within this group. Lastly, children of displaced fathers are observed to spend less on education. They display lower enrollment rates in higher educational institutions and often lean towards majors with more direct employment prospects. Economically, these children's annual earnings are roughly 9.4% beneath those of their peers whose fathers remained insulated from job displacement during the crisis.

Summary

KDI FOCUS Women’s Career Interruptions and the Declining Fertility Rate in South Korea

In South Korea, more women are postponing or forgoing childbirth due to concerns about career interruption. Their conscious decision to refrain from motherhood is estimated to be responsible for about 40% of the decrease in the fertility rate. In the face of the world’s lowest fertility rate, Korea needs to overhaul its policies to better support work-life balance, enabling parents to maintain their careers while raising children.

- Traditional economic theory explains the decline in fertility rates as a result of the increase in women’s opportunity costs.

- Since the 2000s, a positive correlation between women’s labor force participation rates, income, and fertility rates has been commonly observed in high-income countries, which appears to be closely associated with the extent to which women (mothers) can balance work and family life.

- South Korea’s low fertility rate may have stemmed from the disproportionate burden of childcare on women, combined with the persistent difficulty in balancing work and family life, leading women to postpone or forgo childbirth.

- If the presence of children significantly affects women’s probability of career interruption, the number of women who forgo childbirth while maintaining their careers due to these concerns may increase.

- If young women choose to have children, their probability of career interruption increases by about 14%p, leading to a higher likelihood of experiencing a substantial level of economic loss throughout their lifetime.

- Since the mid-2010s, Korea’s total fertility rate has rapidly decreased, as the gap in career interruptions based on parenthood status has widened.

- Recently (2013~19), the gender employment gap has narrowed. Still, this converging trend has been limited to the young without children, ironically increasing the women’s opportunity costs for choosing to give birth. This increased child penalty is estimated to account for about 40% of the overall decline in the fertility rate.

- Policies aimed at preventing career interruptions for women with children are expected to contribute to raising the fertility rate by reducing the number of women who delay or forgo childbirth.

- Policies that mitigate career interruptions for women with children can increase labor supply and prevent the erosion of irrecoverable human capital, thereby not only helping to raise the fertility rate but also promoting macroeconomic growth.

Summary

KDI FOCUS Korea’s National Pension: Structural Reform Measures

South Korea has been under acute pressure to sustain its National Pension Plan without the risk of fund depletion. Given the looming fiscal threat, this study proposes the introduction of a new pension, a fully-funded system designed to ensure intergenerational equity. This reform aims to guarantee that future generations can receive pension benefits equivalent to the contributions paid and investment returns, without the fear of resource exhaustion. For contributions made prior to the reform, the benefits promised under the existing plan should be honored, while addressing the resultant financial shortfalls of the old pension through separate management and strategic utilization of the general budget to bridge these gaps. This study stresses the urgency of immediate action since the prompt implementation will substantially reduce fiscal stress.

- Under the current scheme, South Korea’s National Pension Fund is projected to be depleted by 2054. As a result, subsequent increases in contribution rates will be prohibitively high for future generations.

- Amid rapid shifts in demographic structure, it is essential to undertake structural reforms and adjust pension parameters to enhance intergenerational equity.

- This study proposes pension reform measures that can keep the expected return rate around one, while approaching this target rate is challenging in Korea, particularly due to the sharp decline in the total fertility rate.

- Provided that the current operation is maintained, increasing the contribution rate from 9% to 18% is likely to result in the reserve fund's complete depletion by around 2080.

- To avoid imposing undue burdens on future generations, adopting a fully-funded “New Pension” system with an expected return rate one is essential.

- With a 15.5% contribution rate, a fully-funded new pension plan will sustain the current average benefit levels for those born in 2006 and later.

- The parallel operation of the old and new pension plans means that the expected return rate gradually declines for each successive birth year, converging to one for those born in 2006 and later.

- To support the adoption of the New Pension, it is necessary to consider measures that ensure the general budget covers the unfunded liabilities of the old pension, estimated at approximately 609 trillion won (26.9% of GDP).

- Since providing general finances early and swiftly minimizes the nominal fiscal burden, it is advisable to initiate fiscal injection before the old pension fund is depleted.

- Delaying the reform of the fully-funded new pension plan by five years is expected to result in an additional 260 trillion won in unfunded liabilities that will need to be covered by the general budget.

- Even though the expected return rate of public pensions is similar to that of private pensions, the necessity of public pensions for social stability is wellrecognized, and worth considering is the fact that Korea’s NPF has recorded somewhat higher returns than private ones.

- With high uncertainties like dramatic demographic changes, bolstering the financial stability of the new pension system requires transitioning from the Defined Benefit (DB) model to the Defined Contribution (DC) model.

- Unlike individual account systems, applying a DCtype pension to age cohorts enables the integration of an income redistribution function.

- In a new DC pension system, it is possible to adjust the income replacement rate through modifications to the contribution rate.

Summary

KDI FOCUS Assessing Old-Age Poverty with Income and Assets: Generational Insights and Policy Directions

Korea’s old-age poverty rate, based solely on income, ranks among the highest in the OECD. While the rate drops slightly when assets are considered, it remains persistently high. There are marked disparities in poverty rates across different elderly birth cohorts, with older groups facing higher rates. A greater share of the low-income, low-asset segment also marks the observed inequality. To effectively address poverty among the elderly, policy efforts should prioritize support for the oldest members of this vulnerable low-income, low-asset segment. Concurrently, financial assistance for seniors in the low-income, high-asset group should be scaled back. A practical move toward this direction would be revising the eligibility criteria for the Basic Pension to include asset-inclusive pensionable earnings.

- Korea’s old-age poverty rate was 43.4% in 2018, the highest among OECD countries (average 13.1%).

- The old-age poverty rate varies markedly across the five elderly generations, with those born in the 1940s or earlier having the highest rates.

- The recent decrease in the old-age poverty rate and the disparities seen across age cohorts can likely be attributed to the growing proportion of individuals born in the 1950s who tend to be less impoverished.

- Given the nascent state of public transfers in Korea, asset accumulation is the likely channel of retirement planning, meaning income alone does not provide a complete picture of old-age poverty.

- When incorporating both income and assets into the analysis, the old-age poverty rate determined by asset incomization is markedly lower than that derived from income alone but remains elevated.

- Korea’s old-age poverty rate, evaluated using both income and assets, still ranks among the highest in the world.

- When incorporating assets into the analysis, the share of the low-income, low-asset varies significantly across generations, particularly among those born in the 1940s and earlier.

- The difference in levels of old-age poverty across generations can be attributed to the intergenerational income disparity caused by rapid economic growth and the differing maturity levels of retirement security systems for each generation.

- To provide targeted assistance for the most vulnerable, the Basic Pension should be based on asset-adjusted pensionable earnings, reducing the support for seniors in the low-income, high-asset category.

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