{"id":2200805,"date":"2023-04-25T17:30:57","date_gmt":"2023-04-25T08:30:57","guid":{"rendered":"https:\/\/koreapro.org\/?p=2200805"},"modified":"2023-04-26T19:17:22","modified_gmt":"2023-04-26T10:17:22","slug":"south-koreas-pension-fund-careens-toward-demographic-cliff","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2023\/04\/south-koreas-pension-fund-careens-toward-demographic-cliff\/","title":{"rendered":"South Korea\u2019s pension fund careens toward demographic cliff"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">In the short term, South Korea\u2019s national pension finds itself in a favorable position. The country boasts low debt, high savings rates, a highly educated workforce and some of the region\u2019s most advanced technology firms, and the pension system has managed to run a surplus for years.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But looking not far into the future, it\u2019s evident that looming demographic challenges due to the country\u2019s world-lowest birth and fertility rates pose serious problems for the sustainability of the National Pension Fund (NPS), which is at the center of retirement planning for tens of millions of South Koreans.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">By 2050, approximately 40% of the population will be over 65, with 25% over 80. Retirement ages may increase, but questions remain about who will cover the medical and living expenses of those who cannot work when over 25% of the population is over 80.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">An analysis of the NPS situation indicates:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The outlook appears more favorable than many national pension schemes, which tend to be either overly generous or underfunded.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Structural challenges render the NPS unsustainable beyond approximately 2045 without additional funding.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Retirement ages and contributions may need to increase substantially, but even then, the long-term viability of the state pension scheme remains uncertain.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Pragmatic solutions such as immigration still face challenges in a country where the public perceives racial and ethnic differences as potential sources of social division.<\/span><\/li>\n<\/ul>\n<p><b>ROSE-TINTED FOREGROUND<\/b><\/p>\n<p><span style=\"font-weight: 400;\">South Korea offers only modest welfare provisions and spends far less than the OECD average on various welfare and <\/span><a href=\"https:\/\/www.oecd.org\/social\/expenditure.htm\"><span style=\"font-weight: 400;\">social programs<\/span><\/a><span style=\"font-weight: 400;\">, including support for senior citizens.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is partly due to the fact that many South Koreans rely on family networks, but the government has made efforts to <\/span><a href=\"https:\/\/webzine.kacpta.or.kr\/news\/articleView.html?idxno=13330\"><span style=\"font-weight: 400;\">improve<\/span><\/a><span style=\"font-weight: 400;\"> the situation in the form of a guaranteed pension for low-income senior citizens.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Nevertheless, the level of support provided to the elderly remains relatively low, and many senior citizens still live in <\/span><a href=\"https:\/\/www.index.go.kr\/unity\/potal\/main\/EachDtlPageDetail.do?idx_cd=1024\"><span style=\"font-weight: 400;\">poverty<\/span><\/a><span style=\"font-weight: 400;\">, which remains widespread by the standards of rich countries.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One consequence of the modest welfare payouts is that the National Pension Fund (NPS) is able to run a large surplus even with remarkably <\/span><a href=\"https:\/\/www.oecd-ilibrary.org\/sites\/d164cfc6-en\/index.html?itemId=\/content\/component\/d164cfc6-en\"><span style=\"font-weight: 400;\">low<\/span><\/a><span style=\"font-weight: 400;\"> mandatory contribution levels by OECD standards. The NPS operates on a contributory principle, where one receives benefits based on one\u2019s contributions, and this system has enabled the country\u2019s reserve fund to <\/span><a href=\"https:\/\/fund.nps.or.kr\/jsppage\/fund\/mpc\/mpc_03.jsp\"><span style=\"font-weight: 400;\">increase<\/span><\/a><span style=\"font-weight: 400;\"> by nearly 50% since 2016.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the short term, this means that the pension fund is on stable footing and will continue to <\/span><a href=\"https:\/\/news.einfomax.co.kr\/news\/articleView.html?idxno=4252114\"><span style=\"font-weight: 400;\">grow in size<\/span><\/a><span style=\"font-weight: 400;\"> until 2040. However, due to sudden demographic changes over the past 40 years, it appears that the fund will be exhausted only 15 years after it peaks in size.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Contributions would have to rise to over 25% (from the current 9%) to cover obligations once the fund is depleted.<\/span><\/p>\n<p><b>TWEAKS AND QUICK FIXES<\/b><\/p>\n<p><span style=\"font-weight: 400;\">A significant area of concern in the national pension is its management. In recent years, the system has seen massive returns; however, quantitative easing across the Western world (though not in <\/span><a href=\"https:\/\/www.kcmi.re.kr\/report\/report_view?report_no=1200\"><span style=\"font-weight: 400;\">South Korea<\/span><\/a><span style=\"font-weight: 400;\"> until the COVID-19 pandemic) has pushed up the value of financial assets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In other words, it is easy to post strong returns when prices for most things are surging, but what about when markets are less forgiving?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some have <\/span><a href=\"https:\/\/www.kcmi.re.kr\/publications\/pub_detail_view?syear=2022&amp;zcd=002001016&amp;zno=1677&amp;cno=5975\"><span style=\"font-weight: 400;\">called<\/span><\/a><span style=\"font-weight: 400;\"> for deepening the technical expertise in running the NPS and shifting away from the home market, where the NPS concentrates most of its capital. Although the NPS has invested a significant amount of its capital in foreign stocks, its overseas bond portfolio remains underdeveloped compared to its holdings in the domestic market.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, given the <\/span><a href=\"https:\/\/koreapro.org\/2023\/03\/why-there-are-reasons-to-worry-about-south-korea-banks-after-svb-collapse\"><span style=\"font-weight: 400;\">hits<\/span><\/a><span style=\"font-weight: 400;\"> many foreign financial institutions have taken on bonds outside the Korean market, this may not have been a bad thing in the short run.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There is also concern that the NPS, as a significant shareholder in many listed companies, is <\/span><a href=\"https:\/\/www.peoplepower21.org\/welfare\/1928388\"><span style=\"font-weight: 400;\">overly<\/span><\/a><span style=\"font-weight: 400;\"> biased toward the management of the firms in which it is invested. South Korea\u2019s problems with <\/span><a href=\"https:\/\/koreapro.org\/the-korea-discount-why-south-koreas-stock-market-is-so-underpriced\"><span style=\"font-weight: 400;\">corporate governance<\/span><\/a><span style=\"font-weight: 400;\"> may be exacerbated by a large, passive government investor that essentially allows management in the country\u2019s firms to make decisions that may not benefit the shareholders.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The NPS has previously behaved in ways that appear to have been overtly <\/span><a href=\"https:\/\/www.joongang.co.kr\/article\/25063451#home\"><span style=\"font-weight: 400;\">against<\/span><\/a><span style=\"font-weight: 400;\"> the interests of its ultimate stakeholders \u2014 its current and future recipients \u2014 as a consequence of the criminal conduct of its former director.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While criminal behavior is unavoidable in any human society, moving away from the home market, especially given South Korea\u2019s less-than-stellar growth prospects and the political problems associated with investing domestically, may help to make the fund less potentially captive to political interests.<\/span><\/p>\n<div id=\"attachment_2200807\" style=\"width: 1880px\" class=\"wp-caption alignnone\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2200807\" class=\"wp-image-2200807 size-post_feature_image_retina\" src=\"https:\/\/koreapro.org\/wp-content\/uploads\/sites\/6\/2023\/04\/apartments-1870x1000.png\" alt=\"\" width=\"1870\" height=\"1000\" srcset=\"https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2023\/04\/apartments.png 1870w, https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2023\/04\/apartments-935x500.png 935w, https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2023\/04\/apartments-1255x670.png 1255w\" sizes=\"(max-width: 1870px) 100vw, 1870px\" \/><p id=\"caption-attachment-2200807\" class=\"wp-caption-text\"><em>Apartment buildings in South Korea, Sept. 27, 2022, <a href=\"https:\/\/www.flickr.com\/photos\/153583264@N02\/52469520950\/in\/pool-14792074@N24\/\">Korea Pro Flickr<\/a><\/em><\/p><\/div>\n<p><b>PAINFUL CHOICES<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Maximizing returns may allow the fund to extend payments for a few more years, but it will likely run dry without serious reform. The current <\/span><a href=\"https:\/\/www.mohw.go.kr\/react\/policy\/index.jsp?PAR_MENU_ID=06&amp;MENU_ID=06410102&amp;PAGE=2&amp;topTitle=\"><span style=\"font-weight: 400;\">retirement age<\/span><\/a><span style=\"font-weight: 400;\"> of 65 for people born after 1969 is unsustainable, as are the <\/span><a href=\"https:\/\/www.oecd-ilibrary.org\/docserver\/0cb13e61-en.pdf?expires=1682239921&amp;id=id&amp;accname=guest&amp;checksum=BCAF9FAFF43B8FD9E0F6725753E2652E\"><span style=\"font-weight: 400;\">low<\/span><\/a><span style=\"font-weight: 400;\"> rates of public expenditure on pensions.\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/www.oecd-ilibrary.org\/docserver\/55190c45-en.pdf?expires=1682240009&amp;id=id&amp;accname=guest&amp;checksum=D04A8BC3FCD67EE294D33948857F9247\"><span style=\"font-weight: 400;\">Low<\/span><\/a><span style=\"font-weight: 400;\"> rates of private investment in pensions exacerbate the situation. Although South Koreans save or invest a <\/span><a href=\"https:\/\/kosis.kr\/statHtml\/statHtml.do?orgId=101&amp;tblId=DT_2KAA612\"><span style=\"font-weight: 400;\">relatively<\/span><\/a><span style=\"font-weight: 400;\"> high percentage of their income, much of this saving goes into <\/span><a href=\"https:\/\/www.kofia.or.kr\/brd\/m_48\/view.do?seq=213&amp;srchFr=&amp;srchTo=&amp;srchWord=&amp;srchTp=&amp;multi_itm_seq=0&amp;itm_seq_1=0&amp;itm_seq_2=0&amp;company_cd=&amp;company_nm=&amp;page=1\"><span style=\"font-weight: 400;\">non-financial<\/span><\/a><span style=\"font-weight: 400;\"> assets, primarily real estate.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There have been calls to redirect some of these savings into the public pension system. One option is raising contribution rates from 9% to 15%, a move that would still put the country well <\/span><a href=\"https:\/\/www.oecd-ilibrary.org\/sites\/d164cfc6-en\/index.html?itemId=\/content\/component\/d164cfc6-en\"><span style=\"font-weight: 400;\">below<\/span><\/a><span style=\"font-weight: 400;\"> many OECD countries.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But this may not be popular if it doesn\u2019t improve the spartan nature of provisions. As a result, some in the National Assembly <\/span><a href=\"http:\/\/www.dhns.co.kr\/news\/articleView.html?idxno=299068\"><span style=\"font-weight: 400;\">advocate<\/span><\/a><span style=\"font-weight: 400;\"> increasing benefit sizes to partially offset rising contribution rates. This is still not likely to be popular, but it may be possible.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Unfortunately, younger generations will need more radical solutions that move beyond fund allocation tweaks, sounder governance and contribution rates if they hope to retire without facing poverty.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">South Korea is a country that appears to be resistant to large-scale immigration, even when immigrants are <\/span><a href=\"https:\/\/onlinelibrary.wiley.com\/doi\/full\/10.1111\/imig.12937\"><span style=\"font-weight: 400;\">ethnic Koreans<\/span><\/a><span style=\"font-weight: 400;\">. It is also a country where much of the public sees racial and ethnic differences as a potential source of <\/span><a href=\"https:\/\/www.pewresearch.org\/global\/2021\/10\/13\/diversity-and-division-in-advanced-economies\/\"><span style=\"font-weight: 400;\">social division<\/span><\/a><span style=\"font-weight: 400;\">. The country\u2019s largely monoethnic society and stingy welfare state make accepting other ethnic groups in large numbers unlikely \u2014 especially if migrants expect equal treatment or require some short-term inducements to relocate.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, by 2030, South Korea will have over 3 million <\/span><a href=\"https:\/\/www.korea.kr\/news\/policyNewsView.do?newsId=148898650\"><span style=\"font-weight: 400;\">fewer workers<\/span><\/a><span style=\"font-weight: 400;\"> under 65 and will lose <\/span><a href=\"https:\/\/news.einfomax.co.kr\/news\/articleView.html?idxno=4241256\"><span style=\"font-weight: 400;\">another<\/span><\/a><span style=\"font-weight: 400;\"> 9 million by 2050. According to World Trade Organization <\/span><a href=\"http:\/\/world.kbs.co.kr\/service\/news_view.htm?lang=e&amp;Seq_Code=149884\"><span style=\"font-weight: 400;\">projections<\/span><\/a><span style=\"font-weight: 400;\">, the decline will be most precipitous in the unskilled worker category.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Fewer workers and more pensions will impact the public purse and likely exert downward pressure on sectors reliant on these workers. Of course, technological advancements and increased retirement ages may contribute to older workers remaining employed beyond 65 or even 75. But ultimately retirement becomes inevitable.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Without significant advancements in robotics to enable automation in labor-intensive fields like care, construction and logistics, additional workers will be required to maintain South Korea\u2019s infrastructure and care for the increasing elderly population.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is essential for the South Korean government to explore more innovative and comprehensive solutions as the country approaches a pension cliff. However, the government is unlikely to take such actions until the problem becomes severe enough for voters to acknowledge the costs of maintaining ethnic purity.<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">Edited by John Lee<\/span><\/i><\/p>\n<div class=\"content-tags\"><a href=\"https:\/\/koreapro.org\/tag\/business-economy\/\"><span class=\"tag\">Business &amp; Economy<\/span><\/a><a href=\"https:\/\/koreapro.org\/tag\/culture-society\/\"><span class=\"tag\">Culture &amp; Society<\/span><\/a><a href=\"https:\/\/koreapro.org\/tag\/domestic-politics\/\"><span class=\"tag\">Domestic Politics<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>In the short term, South Korea\u2019s national pension finds itself in a favorable position. The country boasts low debt, high savings rates, a highly educated workforce and some of the region\u2019s most advanced technology firms, and the pension system has managed to run a surplus for years. But looking not far into the future, it\u2019s [&hellip;]<\/p>\n","protected":false},"author":10407,"featured_media":2200806,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[24,25,27],"class_list":["post-2200805","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-business-economy","tag-culture-society","tag-domestic-politics"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>South Korea\u2019s pension fund careens toward demographic cliff - KOREA PRO<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2023\/04\/south-koreas-pension-fund-careens-toward-demographic-cliff\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"South Korea\u2019s pension fund careens toward demographic cliff - KOREA PRO\" \/>\n<meta property=\"og:description\" content=\"In the short term, South Korea\u2019s national pension finds itself in a favorable position. 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