National Pension deficit projected for 2034 amid calls for system reform

The National Pension fiscal balance is expected to turn into a deficit by 2034, with the fund projected to be depleted in 2054. To ensure generational equity, the Korea Institute of Public Finance suggests strengthening a multi-layered system that includes converting retirement pensions into annuities to supplement the income replacement rate by approximately 16%p.

To ensure the financial stability of the National Pension and enhance generational equity, there is an urgent need to restructure the multi-layered retirement income security system to encompass the basic pension and retirement pensions, moving beyond a single National Pension framework.

According to the research report "Fiscal Policy Tasks for Retirement Income Security: Focusing on the Sustainability of the National Pension" released by the Korea Institute of Public Finance, the pension fiscal balance is projected to turn into a deficit in 2034, with the fund expected to be depleted in 2054, based on the National Pension system prior to the 2025 reform. As of 2023, the accrued liability of the National Pension was estimated to reach approximately 100.8% of GDP.

Strengthening the Redistribution Function of the Basic Pension and Reforming the National Pension Structure

The study identified the financial difficulties arising from the process of supplementing the National Pension's income replacement rate and the equity issues with the basic pension as core challenges. As the amount of basic pension benefits continues to increase, equity issues with National Pension recipients are intensifying, which acts as a practical constraint on increasing the income replacement rate of the National Pension.

As an alternative, a plan was proposed to allow the basic pension to supplement the insufficient income replacement rate of the National Pension within a multi-layered system. Specifically, the analysis suggests that as the National Pension transitions to an income-proportional model, it is necessary to review measures to gradually adjust the current benefit structure so that the basic pension can perform a redistribution function.

Potential to Supplement Income Replacement Rate by 16%p through Pensionization of Retirement Pensions

The role of retirement pensions is decisive in alleviating the financial burden of the National Pension while stably guaranteeing retirement income. According to the study, if retirement pensions are converted to be received in the form of an annuity rather than a lump sum, the retirement income replacement rate can be supplemented by approximately 16%p.

The core of the research is that the multi-layered income security system should be strengthened by increasing the annuity receipt rate of retirement pensions, while simultaneously conducting structural and parametric reforms of the National Pension. In particular, it was projected that if the 2025 reform plan is applied, the National Pension liability would decrease to 86.9% of GDP, and if an automatic stabilizer is introduced, it could be lowered to 79.2%.

In conclusion, to build a sustainable pension system, parametric reforms for the financial stabilization of the National Pension must be carried out alongside efforts to resolve blind spots in the National Pension, such as the dual structure of the labor market and the income identification system, and to restructure the multi-layered security system including retirement pensions.

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