The Korean Pension System

Abstract

Since its inception in 1960 only for government officials, the pension system in Korea has evolved into a more inclusive one by continuously expanding its coverage, to career soldiers in 1963, to the private school teachers and staff in 1975, to the post office employees in 1982, to the entire private sector workers in 1988, and to the self-employed persons in 1999. Currently, the system takes a typical multi-tier structure: namely, the tax-based mean-tested public assistance programs; the contribution-based public pension programs for all private-sector employees; and, the private retirement and personal savings programs. However, the system still lags other advanced economies in several aspects: for example, the relatively low income replacement ratio of 43.4% (the 69% on the average in the US, Japan, Germany, UK, and France); the low contrition rate of 9% versus 20.5% in those five; and, the low subscription rate for the private pension (16.9% vs. 54.3%). Going forward, the system is assessed to be vulnerable to the rapid population aging, the demise of the traditional family-support for elderlies, and the growing financial burden for future generations, for which we discuss several potential remedies, including the home pension program.