"You Should Receive Benefits Equivalent to Your Contributions"… KEF Announces National Pension System Innovation Measures

Adjustment of Pension Benefits Reflecting Only Inflation Rates

Need for Automatic Adjustment Mechanism Incorporating Demographic Factors

Improvements Needed to Ensure Fairness Between Lifetime Contributions and Benefits

With the amended National Pension Act, which includes phased increases in the national pension contribution rate and a higher income replacement rate, taking effect this year, business leaders have recommended that fiscal sustainability and fairness between lifetime contributions and benefits must be strengthened to enhance the system's acceptance among participants.

The Korea Employers Federation (hereinafter referred to as KEF) released its report on September 2 titled "Innovation Measures for the National Pension System to Enhance Public Trust," outlining structural improvements needed across the system, including finance, the contribution structure, benefits, and fund management.

KEF pointed out that, "Although the National Pension Act was amended in April last year to enact both parametric reforms and the state's payment guarantee, a national awareness survey conducted in November showed that 55.7% of respondents said they do not trust the National Pension."

KEF identified the main factors undermining public trust as follows: a financial foundation that does not reflect demographic changes; a dual premium levy and collection structure based on membership type; a pension reduction system inconsistent with social and economic changes; a benefit structure overly centered on income redistribution; and a lack of expertise and independence in the fund management governance system. KEF suggested corresponding areas for improvement.

First, KEF argued that, alongside parametric reforms, another policy package should be introduced to boost fiscal stability. When setting the annual increase in pension benefits, an automatic adjustment mechanism should be implemented that takes into account demographic and economic factors such as rising life expectancy and declining contributor numbers, in addition to inflation, to ensure both fiscal sustainability and generational fairness.

Regarding improvements to the contribution and collection structure for individually insured regional participants, KEF noted that, unlike workplace-based subscribers, regional contributors must report their income and pay premiums directly. This creates problems such as underreporting of income or failure to make consistent contributions. KEF therefore suggested that while retaining the current self-reporting principle, it is necessary to strengthen links and verification with National Tax Service data and to promptly adjust the standard monthly income if there is a significant gap between reported and verified incomes, thereby transitioning to a "hybrid" levy system.

KEF also highlighted the need to revise the pension reduction system to reflect socio-economic changes. Current systems such as the reduction of old-age pensions for those still employed and the reduction in overlapping old-age and survivor pensions do not adequately account for changed socioeconomic conditions or the lifetime contributions of members. KEF stated that such reduction measures should be either abolished or significantly loosened to strengthen fairness between contributions and benefits.

KEF further emphasized the necessity of redesigning the benefit structure by expanding the proportion of earnings-related benefits. Currently, the national pension incorporates flat-rate benefits (A value) and earnings-related benefits (B value) equally (50:50), leading to significant gaps in the income replacement rate according to income level. KEF suggested reducing the portion of flat-rate benefits (A value) and expanding earnings-related benefits (B value) to better link contributions and benefits, thereby encouraging faithful payment of premiums and long-term participation.

In addition, KEF suggested that since the top decision-making body for the National Pension Fund, the Fund Management Committee, is composed largely of government and participant representatives, the possibility of external intervention in decision-making always exists. KEF therefore recommends reorganizing the committee into a permanent body centered on investment and finance professionals and establishing a system for professional and responsible fund management.

Lee Sangcheol, Head of the Employment and Social Policy Division at KEF, stated, "The fact that public trust in the national pension remains low despite parametric reforms shows that the core principles and operating system of the pension system need to be thoroughly reviewed. The system should be improved so that generational burdens are distributed more fairly and contributors see their contributions reflected equitably in their benefits. In parallel, by enhancing the professionalism and independence of fund management, the National Pension must become a system that all generations can rely on and trust."

This content was produced with the assistance of AI translation services.