Implications of Recent Income Distribution Trends on National Pension Reform Discussions

Abstract

The maturing of the National Pension scheme has helped improve income distribution recently, but its effect has been limited due to a large coverage gap in the system. Against this backdrop, the focus in pension reform discussions needs to be reset toward enhancing enrollment instead of heightening the replacement ratio.

- ① Growth and distribution in a virtuous cycle after economic development in the 1960s; ② deteriorating distribution after the early 1990s; and ③ signs of improvement in distribution thanks to redistribution in recent years.

- Overall, the poverty rate of respective population groups is declining, and the increase in the senior population is largely to blame for the heightening poverty rate.

- The recent reduction in poverty is owing to the maturing of the National Pension.

- Public pension benefits 76% of the povertyescaping households in the redistribution process.

- The main channel for redistribution through tax expenditures is through public pension payments

- The higher public pension’s income replacement ratio rise, the more households with no earned income appear. As a result, market income inequality would worsen and redistribution will seemingly function strongly.

- Fixation to income replacement ratio in pension reform discussions originated from certain myths: ① Korea’s income replacement ratio is low, and ② that is mainly responsible for the old-age poverty.

- Households with public pension are 44.6% likely to escape poverty through redistribution, but those without show only a 9.8% likelihood.

- The presence of a coverage gap in its pension system is the main reason of Korea having difficulty in reinforcing a redistribution function.