If You Defer National Pension, Inflation Rate is Applied Compoundly to the 'Deferred Increase Amount'

An analysis has emerged showing that if one utilizes the 'deferred pension' system to delay the timing of receiving the National Pension, the received amount increases compoundly, as not only the increase amount according to the deferral period but also the inflation rate is additionally reflected. This is because while the deferred increase rate is applied as simple interest, the inflation rate is applied in a compound manner that accumulates every year.

Structure of Pension Amount Increase According to Deferral Period and Monthly Addition Method

According to a video from the YouTube channel 'Pension Doctor', the National Pension is divided into the 'early pension scheme', where one receives it 5 years earlier than the normal receiving age, and the 'deferred pension' system, where one receives it 5 years later. When receiving early, the amount is reduced by 6% per year, resulting in receiving an amount reduced by a maximum of 30% over 5 years. On the other hand, if one chooses the deferred pension, the amount increases by 7.2% per year, and if deferred for a maximum of 5 years, one can receive a pension increased by 36% for life.

The specific calculation method for the increase is applied on a monthly basis. In the video, an example was given of a recipient scheduled to receive a base pension of 1 million won at the normal commencement age of 65. For every month this recipient defers, 0.6% is added, resulting in 1,006,000 won; if they defer for 2 months, 1.2% is added, resulting in 1,012,000 won. If they defer for 3 months, they receive 1,018,000 won, and if they defer for 1 year, 7.2% is added, resulting in 1,072,000 won. If they defer for 2 years, they receive 1,144,000 won with a 14.4% increase; for a 3-year deferral, they receive 1,216,000 won, and for a 4-year deferral, 1,288,000 won. If they defer for the full 5 years, they will receive 1,360,000 won, which is a 36% increase, for life.

Inflation Rate Reflected Separately... Based on Article 62, Paragraph 4 of the National Pension Act

What many recipients are curious about is whether 'the inflation rate is additionally reflected in the amount to which the deferred increase rate has been applied.' The presenter explained, based on Article 62, Paragraph 4 of the National Pension Act, that the inflation rate is additionally reflected separately from the deferred increase rate. According to the relevant legal clause, if a deferred pension recipient desires, it is specified that both the amount that was not deferred and the amount for which a deferral was requested shall be adjusted according to the inflation rate and then paid.

Specifically, according to Article 62, Paragraph 4, Item 3 of the National Pension Act, if a recipient who has applied for a partial deferral of pension payments desires the payment of the entire pension, they shall be paid the sum of 'the amount adjusted according to Article 51, Paragraph 2 among the old-age pension amounts for which payment deferral was not requested' and 'the amount obtained by adding 6/1,000 of that amount for every 1 month of deferral to the amount adjusted according to Article 51, Paragraph 2 for the amount for which payment deferral was requested.' Here, Article 51, Paragraph 2 contains the content that the amount is adjusted based on the national consumer price change rate of the previous year compared to the year before the year preceding the pension receipt. In other words, this serves as the legal basis for applying the inflation rate even to the deferred increased amount (the deferred addition amount).

For example, if a person with a base pension of 1 million won defers for 1 year and assuming the annual inflation rate is 3%, this recipient will receive the sum of the amount to which the inflation rate is applied to the 1 million won they were originally supposed to receive, and the amount to which the inflation rate is applied to the 72,000 won, which is the 1-year deferral addition. The calculation formula would be [1 million won × 1.03] + [72,000 won × 1.03], resulting in a total receipt of 1,104,160 won. This is a larger amount than the simple increased amount of 1,072,000 won. If they defer for 2 years, they will receive the sum of the first-year addition and the second-year addition, and the inflation rate will be applied cumulatively every year (1.03 × 1.03).

Advantage of Deferred Pension over Early Receipt and the Compound Effect

The biggest characteristic of the deferred pension is that the inflation rate acts as 'compound interest'. This is because while the deferred increase rate itself is a simple interest method where it is added on an annual basis, the inflation rate reflected every year is reflected in a compound interest method where it is multiplied by the previous year's amount again.

The presenter compared the gap between early recipients and deferred pension recipients, explaining that since early recipients have the inflation rate reflected based on a smaller amount reduced by up to 30%, their growth speed is slow, whereas deferred recipients have the inflation rate applied compoundly based on a larger amount increased by up to 36%, so the growth speed of the pension amount is much faster. However, it was also mentioned that in cases where health is poor or the immediate economic situation is urgent, one might inevitably have to receive the pension early.