South Korea announces detailed pension reform plans to delay depletion

Pension reforms: South Korea's government on Wednesday proposed reform plans to delay the depletion of the country's $855 billion public pension fund, which is on track to run out of funds by the mid-2050s due to a rapidly ageing population.

The detailed proposal by the welfare ministry comes after President Yoon Suk Yeol's pledge last week to make the pension system more equitable and sustainable.

In the proposal, the ministry said it would raise the contribution rate of the mandatory pension scheme for the first time since 1998 to 13 per cent of income, from the current 9 per cent, to bring it closer to an average of 15.4 per cent for members of the Organisation for Economic Co-operation and Development (OECD).

The pace of increase, however, will be adjusted by age group to make it equitable - by 1 percentage point each year for those in their 50s, 0.5 percentage point for people in their 40s, 0.33 percentage point for those in their 30s and 0.25 percentage point for those in their 20s.

The ministry said it would also expand pension credits for childbirth and military service.

The nominal income replacement rate, the ratio of pension payouts to average income, will be kept at the current 42 per cent, the ministry said. The rate had previously been set to be lowered to 40 per cent by 2028.

Meanwhile, the pension fund will continue raising investments in overseas assets and alternative investments to raise its long-term investment returns by at least 1 percentage point to 5.5 per cent or higher, which alone is expected to push back the depletion of funds to 2072.

South Korea's public pension fund, established in 1988 and currently the world's third-largest with 1,147.0 trillion won ($855.4 billion) in assets as of the end of June, is expected to be depleted by 2056 as payments start to outpace contributions from 2041.

The ministry said it would consider introducing a mechanism automatically adjusting pension payments according to changes in macroeconomic conditions, already in place in most OECD countries.

South Korea's population has started shrinking since reaching its peak in 2020 at 51.84 million, and the speed of decline is expected to quicken because of sharp falls in its birth rates, already the world's lowest.

Depletion means the pension system will have to be switched to a "pay-as-you-go" scheme, in which current pension payments are financed by today's taxpayers, from a funded scheme.

In a survey conducted by the Korean Women's Development Institute last year, 75.6 per cent of 1,152 people aged 20-39 said they did not have trust in the pension system, while 82.6 per cent said they were concerned they would not be paid pensions after funds run out.

Along with all the measures, the government said it would seek a legislative amendment to make it clearer that pension payments are guaranteed by law.

The ministry plans to implement the changes in 2026 after completing the required legislative procedures and budget preparations in 2025.