South Korea’s Pension Crisis Explained

Demographic, financial, and political challenges paint a grim picture for the country’s pension system.

While speaking with reporters in Seoul on Thursday, August 29, South Korean President Yoon Suk Yeol revealed his plan to reform the nation’s faltering National Pension Service (NPS). Proposing legislation that would guarantee retirement payments regardless of the program’s solvency, Yoon also pushed for differential contribution rates based on age. The plan is just the latest attempt to defuse the ticking time bomb that has become the nation’s welfare state. According to internal reports from 2023, the world’s third-largest pension fund is projected to run out of money by 2055.

It is a crisis of demographics as much as it is taxes or retirement planning. South Korea has the world’s lowest fertility rate, with an average of 0.72 births per woman. In Seoul, the birth rate is even lower, only 0.55 births per woman. In addition, housing in the capital city and the surrounding metropolitan area has increasingly become unaffordable. This, combined with declining marriage rates, an unusually long workweek, and a significant gender pay gap, has created a social and cultural environment in which many Koreans feel having children is no longer an option. Put simply, the country is slowly running out of workers to keep the pension program afloat.

“Pension reform has been one of President Yoon's three main priorities since the beginning of his administration, alongside labor and education reforms,” Says Jinwan Park, a Schwarzman Scholar and columnist at the Korea Times. “In October 2023, the Health Ministry submitted recommendations to the National Assembly, which has final say over pension reform. However, these recommendations were criticized for lacking detailed scenarios.”

Founded in 1988, the NPS originally only covered businesses with at least 10 full-time employees. However, as the program became more popular, it eventually became the primary method of retirement for South Korea’s seniors. Compulsory service was extended to farmers, fishermen, and finally the majority of the population by 1999. Based out of the city of Jeonju, the organization administers its program through 112 regional offices dispersed throughout 7 regional districts. Today, it is the third-largest pension fund in the world, managing 948.7 trillion Korean wons in assets. Currently, the program manages the retirement portfolios of 22.35 million Koreans.

Like most international retirement programs, enrollment is primarily handled through the employer. Both the employer and employee have a contribution rate of 9%, and post-retirement benefits are determined based on contributions made throughout an individual’s career. Benefits can be claimed starting at 55, although discussions about raising the retirement age have persisted for years.

The program’s impending bankruptcy was originally revealed back in 2023 by Chun Byung-mok, a budget committee chairman, and the announcement quickly pushed the nation’s looming retirement crisis to the forefront of national politics. “If the current pension structure is maintained, its incomes will outpace payouts for the next 20 years but the trend will reverse from 2041,” Chun told the press in late January. “The need for pension reform has become stronger because of the deteriorating fiscal situation.”

President Yoon’s proposal, which would increase general contributions rates across the board, was introduced during a highly anticipated press conference that also covered alliances and North Korea. "Now is the time to fundamentally reform the national pension system that has the confidence of neither the elderly nor the youth," Yoon said. "A pension system that leaves the elderly poor and young people suspicious must fundamentally be reformed.” However, with an approval rating currently at 29.6 percent, President Yoon’s far-reaching proposal might already be dead in the water. In addition, it is unlikely that the opposition Democratic Party (DP), which controls Parliament, will approve the reform package without significant revisions.

“The government's latest proposal suggests a 13% contribution rate and 42% income replacement rate. This is unlikely to pass without revisions. The Ruling People’s Power Party leadership has already expressed disappointment that the recommendation doesn't incorporate a comprehensive, structural package reforming national, basic, and retirement pensions together,” says Jinwan Park. “Further complicating matters, the parties disagree on the discussion process. The PPP wants to create a special committee with equal representation from both parties, while the DP argues the process should go through the standing committee, where they hold a numerical majority.”

It is unlikely that President Yoon’s proposal will survive Parliament unscathed, however, it is a difficult step in the right direction. South Korea’s rapidly aging population places significant strain not just on its social welfare system, but its geopolitical survival as a regional power. A state that cannot adequately care for its senior citizens cannot be expected to continue being a bulwark against its competitors, particularly the likes of those in Pyongyang and Beijing. Ultimately, passing pension reform is as much about national security as it is about social welfare, and should be treated as such.

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Editorial contributions by Rachael Rhine Milliard