🚨 National Pension Reform, Premium Increase and Payment Guarantee Codification
Today Korean Economic News | 2025.03.21
📌 National Pension Reform, Premium Increase and Payment Guarantee Codification
💬 As the National Pension reform bill passes through the National Assembly, the premium rate will increase by 0.5 percentage points annually from 2026, reaching 13% by 2033. The income replacement rate will rise from 40% to 43%. First children will also be eligible for childbirth credits, and military service credits will be expanded from 6 months to 12 months. Support for low-income regional subscribers will be strengthened, and pension payment guarantees will be codified to focus on alleviating public anxiety.
1️⃣ Easy to Understand
The National Pension system is facing significant changes. The reform bill passed by the National Assembly after long discussions includes premium increases along with enhanced pension benefits. I'll explain what this change means for us in simple terms.
The National Pension is Korea's core system for retirement income security. It's a system where you pay premiums during your income-earning period and receive a pension after retirement to maintain your lifestyle. However, due to low birth rates and an aging population, concerns about the sustainability of pension finances have been growing as the elderly population receiving pensions is increasing while the younger generation paying premiums is decreasing.
The core of this reform is an increase in the premium rate. The current premium rate of 9% of income will increase by 0.5 percentage points annually from 2026, reaching 13% by 2033. For example, an office worker with a monthly salary of 3 million won currently pays 270,000 won in premiums (135,000 won by the individual, 135,000 won by the company), but by 2033, this will increase to 390,000 won (195,000 won by the individual, 195,000 won by the company).
At the same time, pension benefits will be enhanced. The income replacement rate (the ratio of pension benefits to the subscriber's average income) will increase from the current 40% to 43%. This means the amount of pension received in retirement will increase. Also, the childbirth credit, which was previously recognized only from the second child, will now apply to the first child, and the military service credit will be expanded from 6 months to 12 months. This is a system that recognizes periods of economic inactivity due to childbirth or military service as if premiums were paid for a certain period.
Support for low-income regional subscribers will also be strengthened. Currently, self-employed individuals or farmers with low incomes had to bear the full premium themselves, but the reform aims to reduce blind spots by expanding support for these groups.
A particularly noteworthy aspect of this reform is the codification of pension payment guarantees in law. Many citizens had anxiety about "Will I really be able to receive a pension in my retirement?" The state aims to alleviate this anxiety by legally guaranteeing pension payments.
This National Pension reform has been made in the direction of 'paying more and receiving more.' While premium burdens will increase in the short term, it will provide more stable retirement income in the long term. It is also being evaluated as having increased social equity through expanded credits for childbirth and military service, and strengthened support for low-income groups. However, fundamental challenges due to demographic changes still remain, and continued system improvements will be necessary in the future.
2️⃣ Economic Terms
📕 National Pension
The National Pension is a public pension system for retirement income security, currently operated on a pay-as-you-go basis where current contributors' premiums pay for current recipients' pensions.
- Citizens aged 18 to under 60 must join mandatorily, and subscribers pay premiums proportional to their income.
- Old-age pension can be received with a minimum of 10 years of subscription, and benefits such as disability pension and survivor pension are also provided.
📕 Income Replacement Rate
The income replacement rate refers to the ratio of pension benefits to the contributor's average income, an indicator of retirement living standards.
- Internationally, an appropriate income replacement rate is recommended at 60-70%, but Korea's current rate of 40% is relatively low.
- Increasing the income replacement rate contributes to alleviating elderly poverty but becomes a factor increasing financial burden.
📕 Credit System
The credit system recognizes contribution history for periods when income activities are suspended due to childbirth, military service, etc.
- The childbirth credit is a system to support women who experience career breaks due to childbirth.
- The military service credit aims to compensate for periods of economic activity suspension due to military service obligations.
📕 Financial Stabilization
Financial stabilization refers to adjustments of premium rates and benefit levels to ensure long-term sustainability of the pension fund.
- Due to low birth rates and population aging, the National Pension fund is projected to be depleted around 2055, necessitating reform.
- Various measures such as premium rate increases, adjustment of benefit commencement age, and benefit level adjustments are being discussed for financial stabilization.
3️⃣ Principles and Economic Outlook
💡 Background and Necessity of National Pension Reform
The background of the National Pension reform includes concerns about demographic changes and financial sustainability.
First, rapid demographic changes are placing a significant burden on pension finances. Korea is one of the countries experiencing the fastest rates of aging in the world. According to Statistics Korea, the proportion of the population aged 65 and over reached about 19% as of 2025 and is projected to exceed 40% by 2050. Meanwhile, the fertility rate has continued to decrease, with the total fertility rate dropping to 0.7 in 2024. These demographic changes mean that pension recipients are rapidly increasing while the working population paying premiums is decreasing. In 2020, the structure was such that 4.5 pension subscribers supported 1 recipient, but by 2050, it is expected that 1.5 subscribers will have to support 1 recipient. This means that if the current system is maintained as is, the burden on future generations will inevitably increase significantly.
Second, the pension fund depletion timeline is accelerating faster than expected. According to the National Pension financial calculation, if the current system is maintained, the National Pension fund is projected to be depleted around 2055. After fund depletion, pensions will have to be paid solely with premiums from the working generation at that time, and it is analyzed that the required premium rate could rise to 25-30% in this case. This imposes an unbearable burden on future generations, causing issues of intergenerational equity. Therefore, awareness has spread about the need for preemptive measures to delay the fund depletion timeline and secure long-term financial stability.
Third, the need to strengthen retirement income security functions is also a major background for reform. Korea's elderly poverty rate is the highest among OECD countries, with about 40% of people aged 65 and over living in poverty. The National Pension's income replacement rate is designed to decrease to 40% by 2028, which is significantly lower than the OECD average (about 60%). Moreover, a significant portion of the current elderly generation is in the pension blind spot due to issues with the timing of the National Pension system introduction. In this situation, strengthening the National Pension's retirement income security function and eliminating blind spots also became important goals for reform.
Fourth, addressing citizens' pension distrust and anxiety was also an important task. Many citizens, especially the younger generation, had distrust and anxiety about whether they would be able to receive pensions in their retirement. This stemmed from various factors including doubts about the sustainability of the pension system, questions about the transparency and fairness of fund management, and issues of intergenerational equity. As this distrust and anxiety were factors weakening the social support base for the pension system, institutional arrangements were needed to restore trust.
Under these circumstances, the National Pension reform was pursued in a direction to achieve a balance between securing financial stability and strengthening retirement income security. In particular, this reform encompasses financial stabilization measures such as premium rate increases, along with content that strengthens retirement income security functions such as income replacement rate increases, credit system expansion, enhanced support for low-income groups, and codification of pension payment guarantees.
💡 Main Contents and Impact Analysis of the Reform Plan
This National Pension reform plan includes various system improvements, let's analyze the impact of each element.
First, the premium rate increase (9% → 13%) will contribute to securing financial stability. With the premium rate increasing by 0.5 percentage points annually from 2026 to reach 13% by 2033, it is expected that the fund depletion timeline can be extended by about 10 years compared to maintaining the current system. While not a complete solution, it helps mitigate the imminent financial crisis and secure time for additional reforms. However, the premium rate increase means increased burden for subscribers. In the case of workers, the individual and employer each bear half, but self-employed individuals or regional subscribers must bear the full amount themselves and may feel a relatively greater burden. This increased burden could potentially lead to side effects such as premium payment avoidance or income underreporting, especially for low-income groups or small business owners.
Second, the income replacement rate increase (40% → 43%) will contribute to strengthening retirement income security. With the income replacement rate increase, subscribers will be able to receive more pension in the future. For example, based on average income (about 3 million won) with 40 years of subscription, under the current 40% income replacement rate, one would receive a monthly pension of 1.2 million won, but under the 43% income replacement rate, one would receive 1.29 million won. This can contribute to improving the quality of retirement life and lowering the elderly poverty rate. However, increasing the income replacement rate means increased pension expenditures in the long term, which can have a negative impact on financial stability. Therefore, it can be seen that the simultaneous increase in premium rate and income replacement rate aimed to balance financial stability and retirement income security functions.
Third, expansion of childbirth and military service credits will contribute to enhancing social equity. Applying childbirth credits for the first child and expanding the military service credit period (6 months → 12 months) have the effect of mitigating the negative impact that economic activity suspension due to childbirth and military service has on pension benefits. In particular, the expansion of childbirth credits is part of policy efforts to address the low birth rate issue and can partially compensate for the disadvantages of career interruption and income reduction due to childbirth. This will also contribute to strengthening women's pension entitlements and reducing gender pension gaps. Similarly, expanding military service credits has the effect of enhancing equity by compensating for economic activity constraints and income loss due to mandatory service.
Fourth, strengthening premium support for low-income regional subscribers will help eliminate blind spots. One of the current important problems with the National Pension is the wide blind spots due to exempted subscribers and long-term defaulters. In particular, self-employed individuals or non-regular workers with low or unstable incomes often avoid joining or default due to the burden of pension premiums. Strengthening premium support for low-income groups will contribute to reducing these blind spots and strengthening retirement income security functions by allowing more citizens to receive adequate levels of pension. However, expanding premium support is a factor increasing financial burden, so it is important to appropriately set the target and level of support.
Fifth, codifying pension payment guarantees has important significance for restoring public trust. Many citizens, especially the younger generation, had doubts about the sustainability of the National Pension system. The anxiety of "Will I really be able to receive a pension in my retirement?" weakened trust in the system and also became a cause of payment avoidance. By specifying pension payment guarantees in law, the state is clarifying its responsibility for pension payments and aiming to alleviate citizens' anxiety. This can strengthen the social support base for the system and contribute to its stable operation in the long term. However, even with legal guarantees, if the financial situation deteriorates, measures such as benefit level adjustments or additional premium increases may be inevitable, so fundamental financial stabilization efforts must continue.
Comprehensively, this National Pension reform plan includes a balanced approach with financial stabilization measures such as premium rate increases, along with measures to strengthen retirement income security functions such as income replacement rate increases, credit system expansion, and enhanced support for low-income groups. This can be seen as an effort to balance financial stability and benefit adequacy, and can be evaluated as an approach that considers intergenerational and inter-class equity. However, additional reforms are expected to be necessary to respond to the fundamental challenges to pension finances due to demographic changes.
💡 Future Tasks and Long-term Outlook
While this National Pension reform is a significant advancement, there are still tasks to be resolved, and additional responses from a long-term perspective are needed.
First, fundamental financial stabilization measures need to be established to respond to demographic changes. With this reform, the premium rate will increase to 13%, and accordingly, the fund depletion timeline is expected to be extended to some extent. However, this is closer to a measure to 'buy time' rather than a fundamental solution to the problem. Considering the trends of continuous low birth rates and rapid aging, additional financial stabilization measures seem inevitable in the long term. In this context, social discussions should continue on adjusting the benefit commencement age (gradually increasing from the current 65 years), enhancing fund operation returns, fair distribution of burden between generations, and other measures. In particular, raising the benefit commencement age is an issue that needs to be considered in light of increased average life expectancy and extended healthy life expectancy trends, but it was not included in this reform.
Second, building a multi-layered retirement income security system is important. It is realistically difficult to guarantee adequate retirement income with the National Pension alone. Therefore, there is a need to strengthen a multi-layered retirement income security system including the National Pension (1st layer), retirement pension (2nd layer), personal pension (3rd layer), and basic pension. Especially for retirement pensions, the system's maturity is still low and the proportion of lump-sum receipts is high, resulting in weak actual pension functions. There is a need for inducing annuitization of retirement pensions, enhancing the efficiency of reserve fund management, and expanding retirement pensions for small and medium-sized enterprise workers and self-employed individuals. Additionally, it is necessary to encourage personal pension subscriptions through tax benefits and strengthen individual responsibility for retirement preparation.
Third, more active measures are needed to eliminate blind spots. Currently, there are still wide practical blind spots among National Pension subscribers, including exempted subscribers and long-term defaulters. Particularly, low-income self-employed individuals, special type workers, platform workers, and other non-standard workers often experience difficulties in joining and maintaining pensions. While this reform strengthened premium support for low-income regional subscribers, more comprehensive and active measures to eliminate blind spots are needed. For this, measures such as building an 'all-citizen pension coverage' system where pension subscription is made for all income regardless of employment type, expanding social insurance premium support, and simplifying subscription procedures need to be considered.
Fourth, building mechanisms for continuous improvement of the pension system and deriving social consensus is important. The pension system needs to be continuously monitored from a long-term perspective and adjusted when necessary. Based on the financial calculation conducted every five years, the system should be regularly checked, and the introduction of an automatic adjustment mechanism that can flexibly respond to changes in demographic structure and economic conditions should also be considered. Additionally, since pension reform can involve sharply conflicting interests between generations and classes, it is desirable for decisions to be made through social dialogue and consensus. For this, it is also important to establish institutional arrangements for deriving social consensus, such as a standing consultative body with participation from government, labor, management, civil society, experts, and others.
Fifth, a comprehensive approach linked to activating the elderly labor market is needed. With increased average life expectancy and extended healthy life expectancy, the possible working period is increasing. In this situation, along with pension system reform, it is important to create an environment where the elderly can work longer. Activating elderly labor market participation through retirement age extension, gradual retirement systems, creating jobs tailored for the elderly, and eliminating age discrimination can help guarantee retirement income while easing the pension financial burden. This approach should be pursued as part of a comprehensive policy package responding to an aging society, beyond simple pension system reform.
While this National Pension reform is a significant advancement, additional reforms and complements are needed from a long-term perspective. Various tasks remain, including fundamental financial stabilization measures responding to demographic changes, building a multi-layered retirement income security system, eliminating blind spots, building mechanisms for deriving social consensus, and activating the elderly labor market. To solve these tasks, continuous attention and cooperation from various stakeholders including government, National Assembly, civil society, and experts will be necessary.
4️⃣ In Conclusion
With the National Pension reform bill passing through the National Assembly, Korea's public pension system has reached an important turning point. This reform, which includes premium rate increases, income replacement rate increases, credit system expansion, enhanced support for low-income groups, and codification of pension payment guarantees, is a product of efforts to achieve a balanced realization of two sometimes conflicting goals: securing financial stability and strengthening retirement income security.
The premium rate increase (9%→13%) starting from 2026 means additional burden for subscribers, but it will contribute to extending the pension fund depletion timeline and increasing the sustainability of the system. The income replacement rate increase (40%→43%) means an increase in the amount of pension to be received in retirement and will help alleviate elderly poverty. Additionally, applying childbirth credits for the first child and expanding the military service credit period will have the effect of mitigating the negative impact that economic activity suspension due to childbirth and military service has on pension benefits.
Particularly important is the codification of pension payment guarantees. Many citizens, especially the younger generation, had doubts about the sustainability of the National Pension system, and by now legally specifying pension payment guarantees, the state is clarifying its responsibility for pension payments and aiming to alleviate citizens' anxiety. This will contribute to restoring trust in the system and strengthening its social support base.
However, not all problems have been solved with this reform. Korea is one of the countries experiencing the fastest rates of aging in the world, and the ultra-low birth rate phenomenon is continuing. These demographic changes pose fundamental challenges to pension finances, and additional reforms will be needed in the long term. Various tasks remain, including adjustment of benefit commencement age, enhancing fund operation returns, strengthening multi-layered retirement income security systems, eliminating blind spots, and activating the elderly labor market.
In conclusion, this National Pension reform is not a perfect solution, but can be considered an important advancement to address the immediate problems. Building a sustainable pension system is not a task that can be completed in a short period but a long-term project that needs to be continuously developed in line with changes in the social and economic environment. What's important is to embody the principle of social solidarity through fair distribution of burdens and benefits between generations and classes, and to establish an institutional foundation that allows all citizens to spend a dignified retirement.