KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Enhancing the Effectiveness of the Long-Term Care Insurance System

Korea’s rapid aging has brought the pressing policy concern of social hospitalization to the forefront. Older adults with low medical but high long-term care needs often occupy beds in high-cost medical institutions for extended periods―a trend that is driving up elderly medical spending. In 2008, the government introduced the Long-Term Care Insurance (LTCI) system to address the growing demand for care among older adults and improve their quality of life, while curbing inefficient medical spending. Since then, long-term care services have expanded in both eligibility and scope. The original three-grade classification was restructured into a six-grade system encompassing older adults with mild dementia, and home-based benefits were strengthened as part of a broader shift from facility-centered to home-centered care.

This study uses the Elderly Cohort Database of the National Health Insurance Service to examine how expanding LTCI affects medical expenditures. For identification, it employs a fuzzy regression discontinuity design and an event study design, exploiting the fact that LTCI grades are assigned based on the Long-Term Care Need Score and that the costs and benefits of these grade assignments shift exogenously around each threshold.

Comparing first-time applicants near each grade threshold, the analysis finds that, for Grades 1 and 2, which correspond to greater care needs, the expansion of either facility-based or home-based benefits reduced medical facility utilization and medical expenditures. By institution type, expenditures declined at hospital-level institutions and long-term care hospitals; by utilization type, inpatient costs decreased. For Grades 3 through 5, by contrast, expanding home-based benefits did not have a statistically meaningful effect on reducing medical expenditures. The event study results show that for the Cognitive Support Grade, which covers older adults with mild dementia, expanded home-based benefits lowered medical expenditures.

These results suggest that the effect of LTCI on medical expenditures may be heterogeneous across grades. Particularly for Grades 3 through 5, the quantity and quality of home-based services may have been insufficient to provide the integrated support to meet complex needs for both medical and long-term care. For the Cognitive Support Grade, however, beneficiaries face fewer physical constraints compared to those with greater care needs. This allows easier access to cost-efficient services such as Day and Night Care Centers for extended hours, which may explain the relatively larger reduction in medical expenditures.

Based on these findings, the study proposes policy measures for improving the quality of home-based care through the integration of medical and long-term care services. In particular, drawing primarily on international case studies, it offers recommendations to ensure the stable and effective implementation of the Integrated Care Support System scheduled for 2026. These measures include introducing intermediate long-term care facilities capable of providing a continuum of medical and long-term care services; developing a specialized workforce to ensure the smooth operation of the new framework; optimizing the expansion of this workforce in depopulating regions; and clarifying accountability for social hospitalization among stakeholders to improve the efficiency of medical expenditures.

Summary

KDI FOCUS Eldercare Workforce: Projections and Policy Implications

Operating beyond the super-aged threshold, Korea faces deepening shortages in its eldercare workforce as the sector struggles to attract workers. While better job quality is imperative to expand this workforce and maintain the quality of life for older adults, incentives for domestic workers alone will not close the gap. Visa policy needs to change to bring in foreign care workers, and care robot technologies should be actively deployed to raise labor productivity in the sector.

- Demand for formal eldercare services is expected to rise sharply, with workforce shortages deepening in step.

- Demand for LTC services is projected to increase by more than 2.4 times between 2023 and 2043.

- Health improvements offset demand only modestly. The growing 85+ population will drive faster growth in high-intensity care (Grades 13).

- The supply of LTC workers is projected to peak at 806,000 in 2034 before declining.

- The share of care workers aged 60 and over is expected to rise from 63.1% in 2023 to 72.6% in 2043, reflecting an increasingly aged workforce.

- Holding the 2023 caseload per care worker constant would require an additional 990,000 workers by 2043.

- Differences in the pace of aging across regions will widen disparities in the number of beneficiaries per care worker.

- Foreign care workers comprised just 0.9% of the total workforce in 2023, a marginal presence in the sector.

- With 56.6% of foreign care workers aged 60 or over and 77% concentrated in the SMA, their capacity to mitigate workforce aging and regional supply disparities remains highly constrained.

- Visa policy for foreign care workers should shift to occupation-specific visas with managed aggregate inflows, guided by the extent to which better job quality can expand the domestic workforce.

- Applying current EPS service-sector quotas to care facilities would permit up to 63,000 foreign workers.

- The E-7 care worker visa pilot should be expanded in scale, alongside efforts to secure sufficient enrollment for the associated training program.

- Attracting domestic workers and retaining recruited foreign careworkers both require better job quality.

- Targeted incentives are needed to encourage employment in underserved regions and ease supply-demand imbalances.

- Care robot uptake in Korea remains low, with just 6.4% of surveyed facilities deploying them.

- The main reason for deploying care robots is to ease the physical burden on care workers; adopters report workload reductions of more than half in some cases.

- Cost is a key barrier to adoption: 51.8% of care facilities would deploy care robots if cost subsidies were provided.

- Care robot policy should expand beyond its developer-centered focus to include support for care facilities, promoting wider adoption in frontline care settings.

Summary

Research Monograph KOR Who Cares for Us?: Policies on Eldercare Workers

South Korea reached the super-aged mark in December 2024, with over 20% of its population aged 65 and older. Eldercare jobs, labor-intensive and emotionally demanding yet accessible to low-skilled workers at low wages, are globally undesirable, leading to labor shortages in advanced economies. As baby boomers (born 1955-1963) enter the late elderly (75 and older) after 2030, demand for eldercare services is projected to surge, worsening supply-demand imbalances.

This study examines the current state and limitations of Korea’s eldercare workforce to propose policy improvements. It estimates eldercare labor supply and demand to forecast the scale of labor shortage and discusses strategies for workforce expansion. Additionally, an empirical analysis assesses how quantitative and qualitative workforce expansion impacts the quality of life for residents in long-term care facilities, providing policy insights.

Chapter 2 forecasts demand for eldercare services and estimates the eldercare labor supply to assess the scale of labor shortage and analyze supply-demand imbalances at the national and metropolitan/provincial levels. The findings indicate that the rapid rise in the super-aged population will sharply increase demand, outpacing the growth of care worker supply and deepening supply-demand imbalances. Regional variations in aging and available workforce are expected to widen the regional supply disparities, suggesting the need for proactive and region-specific workforce expansion policies. This chapter also estimates demand for services that reflect improvements in elderly health in the past decade, highlighting that workforce expansion alone is insufficient to resolve the supply-demand gap amid sustained demand growth. Managing demand for long-term care services through elderly health promotion and functional improvements is essential.

Chapter 3 investigates how expanding the eldercare workforce in long-term facilities affects health outcomes for care recipients. Using health insurance claims and long-term care insurance data, it examines the impact of the 2018 minimum wage increase and the 2022 staffing requirement changes on facility employment and recipients’ medical service utilization. The results indicate that workforce expansion is associated with reduced medical service use, leading to positive health outcomes, suggesting investment in care worker expansion can be a cost-effective policy measure.

Chapter 4 empirically analyzes the impact of enhancing nursing functions in eldercare workers on care recipients and discusses the need for improving their expertise. This chapter examines how changes in nursing staff skill composition following the 2018 minimum wage increase and the specialized nursing care unit pilot program launched in 2019 affected recipients' medical service utilization. The analysis shows that strengthening medical functions in long-term care facilities significantly reduces residents' use of high-cost inpatient services, leading to lower overall healthcare expenditures. While the increased costs of long-term care services partially offset these savings, the results suggest that the specialized nursing care unit program aligns with policy goals of optimizing healthcare utilization among facility residents.

Chapter 5 identifies the characteristics of foreign care workers using administrative data, albeit to a limited extent, aiming to enhance understanding of migrant labor in the eldercare sector. With restricted foreign worker employment in eldercare roles in Korea, this chapter assesses the potential impacts of their integration through existing literature. Furthermore, it reviews specific policy responses from countries utilizing migrant worker policies to mitigate eldercare labor shortages and discusses implications for Korea's eldercare sector.

Chapter 6 proposes future policy directions for eldercare workforce expansion based on the findings from the preceding chapters. First, quantitative workforce expansion enhances job quality, reduces workload through care technology, and utilizes migrant labor. Second, elevating the professional competence of the eldercare workforce involves strengthening nursing functions in long-term care facilities, clarifying the scope of nursing care that can be provided within such facilities, and enhancing education and training in geriatric medicine for facility staff. Third, managing care demand through health promotion entails implementing mental health and chronic disease management strategies to delay the need for eldercare. By addressing these areas, this study aims to contribute to the development of sustainable policies that ensure adequate workforce supply while improving the quality of eldercare services in Korea.

Summary

Policy Study KOR Income Support in Response to Labor Market Shocks: Korea‘s Basic Livelihood Security System

This study examines how labor market conditions and labor policy changes affect benefit receipt under Korea’s National Basic Livelihood Security (NBLS) system. Given the substantial coverage gaps in employment insurance, NBLS serves as the last-resort safety net for low-income individuals who are able to work. Assessing its responsiveness to economic shocks and policy changes is essential for evaluating the effectiveness and limitations of the current income support system.

First, the study analyzes the responsiveness of NBLS benefit receipt and expenditures to key labor market indicators, such as the unemployment rate and the employment rate. The results show that, overall, NBLS has not exhibited meaningful counter-cyclical responsiveness to labor market fluctuations. Although a modest increase in benefit responsiveness to the unemployment rate is observed following the 2015 reform, responsiveness remains broadly limited ― even during the COVID-19 period. However, in contrast to the weak correlation with the aggregate employment rate, declines in the employment rate of middle-aged unpaid family workers show a clear association with increases in NBLS receipt. These findings suggest that NBLS has limited responsiveness to labor market fluctuations among the working population, though it appears responsive for specific vulnerable groups such as unpaid family workers.

Second, the study examines the effects of minimum wage increases ― a key labor policy targeting vulnerable workers ― on NBLS benefit receipt. The analysis shows that sharp minimum wage hikes increased both overall NBLS receipt and livelihood benefit receipt, particularly among middle-aged individuals. Monthly analyses that control for other NBLS reform effects also confirm that minimum wage increases raised benefit receipt among the working-age population. Moreover, this increase was driven primarily by new entrants to NBLS rather than by a slowdown in exits.

These findings align with the earlier results showing that NBLS receipt is particularly responsive to labor market shocks among certain vulnerable groups, such as middle-aged unpaid family workers. Previous studies have shown that minimum wage increases reduce employment rates among vulnerable groups in the labor market, including the self-employed and unpaid family workers. Taken together, the analysis suggests that employment shocks experienced by unpaid family workers may constitute a key channel through which NBLS benefit uptake rises ― particularly among the middle-aged population.

This paper emphasizes the importance of establishing and strengthening an income support system that is responsive to labor market dynamics, especially in light of anticipated structural changes and labor policy reforms. Moreover, because labor and welfare policies often target overlapping populations and interact in practice, it is essential to carefully consider these interconnections in the design and implementation of related policies.

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.

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