South Korea’s parliament on Thursday passed a bill to reform the country’s $830 billion pension fund and delay the depletion of the state fund that has been on track to run out by the mid-2050s due to a rapidly ageing population.
The bill’s passage marks the first time parliament has agreed to a major shake-up in the state pension fund in 18 years and could delay depletion.
Under the legislative amendment, contributions and payouts will rise, the former more steeply, after the ruling People Power Party and the main opposition Democratic Party agreed on the rate of increases.
The contribution rate for the mandatory pension scheme will rise to 13% of income, from the current 9%, as proposed by the government in September. The contribution rate will increase at a different pace for each age group.
The nominal income replacement rate, the ratio of pension payouts to average income, will be increased to 43%, from this year’s 41.5%. The rate had previously been set to be lowered by 0.5 percentage points each year to 40% by 2028.
That is higher than the government’s proposal of keeping it at last year’s 42%. The left-leaning Democratic Party, which holds a majority in parliament, had argued for a hike to 45%.
Pension credits for childbirth and military service will also be expanded in line with the government proposal.
“It is very meaningful that we have brought a reform to the pension system for the first time in 18 years,” said Choi Sang-mok, the country’s acting president.
Still, more reforms and a mechanism automatically adjusting pension payments are also necessary for the sustainability of the pension scheme, Choi added.
The reform is expected to delay the depletion of South Korea’s public pension fund, established in 1988, but by less than the 16 years estimated for the earlier government proposal.
The public pension fund, the world’s third-largest with 1,212.9 trillion won ($830.67 billion) in assets as of the end of 2024, is expected to be depleted by 2056 under the current scheme as payments start to outpace contributions from 2041.
South Korea’s population has been declining since 2020 when it peaked at 51.84 million, with people aged 64 or older accounting for 15.7% of the total. That ratio is expected to rise to 34.4% by 2040 and 46.4% by 2070, according to government estimates.
Reuters
