News from the Financial Associated Press on January 29 (edited by Xiaoxiang)Affected by factors such as low fertility rate and population aging, South Korea is undoubtedly facing an increasingly urgent “population cliff” crisis. In recent years, the South Korean government has begun social discussions on extending or abolishing the retirement age system, and a new report released by the South Korean National Pension Budget Committee this week has undoubtedly further increased the anxiety of the people in the country about how to provide for the elderly…
South Korea’s National Pension Fund (NPS), South Korea’s official pension fund, is expected to run a deficit starting in 2041 and be completely exhausted by 2055, the National Pension Budget Committee said on Friday.
The latest report intensifies pressure on the government to implement pension reforms at a time when Asia’s fourth-largest economy faces low birth rates and an aging population.
The latest forecast for depleting pension funds is a full two years ahead of an assessment made five years ago. At present, the statutory retirement age in South Korea is 60 years old, which also means that if the pension reform is not carried out or the trend of low birth rate is curbed, the “post-95s” in South Korea will have no pension to receive when they retire…
Chun Byung-mok, chairman of South Korea’s National Pension Budget Committee, said at a press conference, “If the current pension structure is maintained, NPS income can still exceed expenditure in the next 20 years, but this situation will reverse from 2041, when There will be a deficit in the balance of payments. With the fiscal situation deteriorating, pension reform is becoming more urgent.”
According to the analysis of the committee, low fertility rate and aging population, as well as the negative impact of economic downturn on finances, are the main reasons for the early exhaustion of Korean pension funds.
In order to professionally manage the national pension fund, the Korean National Pension Fund was officially launched in 1988. It is now one of the largest pension funds in the world, with a total asset value of 915 trillion won (about 741 billion U.S. dollars). According to the Korean National Pension Act, the fund performs statutory functions on the national pension fund. The sole purpose of the fund establishment is to maintain and develop the national pension fund, which is a reserve fund for providing pensions for the Korean people.
The Korean National Pension Fund is mainly funded by the labor force’s payment of national pension insurance premiums and investment returns. Since its establishment, the cumulative return of the fund has reached 480 trillion won.
South Korea’s working-age population contributes 9 percent of their income to pension funds each year. Last year, the Korean National Pension Fund paid out a total of 24.2 trillion won in pensions. South Koreans can receive a pension of up to 2.5 million won per month.
Is the pension crisis getting closer?
According to official data released by the South Korean government, as of 2021, South Korea’s working-age population (15-64 years old) accounted for 71.7% of the total population, but by 2050, this proportion is expected to drop significantly to 51.3%.
The negative population growth brought about by the low fertility rate is obviously the main reason for this scene. According to data released by Statistics Korea on Thursday, the number of newborns in South Korea hit a record low in November last year – a total of 18,982 babies were born that month, a decrease of 4.3% from the same period last year. This is the lowest number for the same month since the Statistical Office began compiling the data in 1981.
In 2018, South Korea reported more deaths than births for the first time. The fertility rate continues to decline as many young people in South Korea delay or forego having children due to a slowing economy and high housing prices. South Korea’s total fertility rate, or the average number of children born to a woman of childbearing age, was just 0.79 in the third quarter of last year, the lowest in the world.
It is worth mentioning that, in addition to the demographic challenges, the underemployment of the elderly, young people, and women is further weakening the Korean labor market.
Although South Korea’s women’s education level ranks high among OECD countries, the country’s female employment rate is only 57.7%. In contrast, the proportions of developed countries in Europe and its close neighbor Japan are both higher than 70%, among which – 76.6% in the Netherlands, 72.2% in Germany, and 71.3% in Japan.
Pension reform is becoming more urgent
According to estimates from domestic institutions in South Korea, if pension reform is delayed, 26% of the wages of the next generation of South Korea will likely be used to pay national pension insurance premiums; by 2080, this expenditure will even account for 50% of total income .
All this makes pension reform more urgent. In recent years, considering the problem of population decline and aging, the tone of the Korean government’s population policy has gradually changed from responding to low fertility to adapting to the era of population decline. Experts say the government will have to borrow more money from 2041 to make up the shortfall and keep paying pensions.
Among measures to increase the economically active population, continuing to employ senior citizens at retirement age is considered the most effective. The South Korean government has also been trying in recent years to plan to raise the legal age of employment to 65 and encourage companies to re-employ people who have reached retirement age, but progress so far has been limited.
In response, Park Jong-hoon, head of research at Standard Chartered Bank in Seoul, has warned,South Korea’s government is not doing enough to deal with the looming pension crisis ahead of next year’s parliamentary elections.
Jong-hoon pointed out, “The answer is there. Everyone knows that we should increase pension contributions and reduce benefits.”
“But it’s certainly a sensitive political topic,” he said. “While the ticking time bomb is slowly ticking, compared with the upcoming elections, the drying up of pensions is still far away, which seems to make it difficult for the government to immediately carry out structural reforms.”