🚨 2025 Korean Pension Reform: Key Changes and Economic Impact

Today Korean Social News | 2025.04.02

📌 "Pay More, Receive Less" National Pension Reform, Sustainability Still in Question

💬 The National Pension Act Amendment has passed the National Assembly plenary session with bipartisan agreement. The contribution rate will be gradually increased to 13%, and the income replacement rate has been adjusted to 43%. Military service and childbirth credits have also been expanded, and insurance premium support for low-income regional subscribers has been reformed. While some view this as meaningful for delaying the fund depletion point by 9 years, there is also strong criticism that political reform does not guarantee real sustainability.

Summary

• The National Pension Act Amendment is a measure to increase pension financial sustainability through raising contribution rates and adjusting income replacement rates.
• Contribution rate increases, income replacement rate adjustments, and expanded credit systems have been pursued to address structural problems caused by population aging and low birth rates.
• Social consensus is needed on issues that still remain, such as increased contribution burden, intergenerational equity problems, and concerns about fund depletion.

1️⃣ Definition

The National Pension Act Amendment refers to legal changes that adjust the contribution rate, income replacement rate, and participant support systems to ensure the sustainability and security of the National Pension System, which guarantees retirement income for citizens. Simply put, it involves adjusting insurance premiums and pension benefit levels and strengthening support for vulnerable groups to ensure stable payment of national pensions in the future.

The National Pension System has been amended several times since its introduction in 1988, and this latest amendment is a measure to address the pension financial crisis caused by population aging and low birth rates.

💡 Why is it important?

• The National Pension is a core social security system that guarantees retirement income for the majority of citizens.
• Rapid aging is threatening the sustainability of pension finances.
• Changes in contribution rates and benefit levels directly affect both current workers and future recipients.

2️⃣ Main Contents and Background of the National Pension Act Amendment

📕 Main Contents of the Amendment

• Contribution rate increase is the core content. The most important change in this National Pension Act Amendment is the increase in contribution rates. The current 9% National Pension contribution rate will be gradually increased to ultimately reach 13%. The specific increase schedule is as follows: 10% in 2026, 11% in 2028, 12% in 2030, and 13% in 2032, increasing by 1 percentage point every 2 years. As the method of workers and employers each bearing half is maintained, the worker's contribution, currently 4.5%, will ultimately become 6.5%. Self-employed individuals and regional subscribers will bear the entire premium themselves. The contribution rate increase is evaluated as an inevitable measure to ensure the sustainability of pension finances in the reality where pension recipients are increasing and premium payers are decreasing due to rapid aging and low birth rates. According to government analysis, this contribution rate increase will have the effect of delaying the fund depletion point from the previously expected 2055 to 2064, about 9 years later.

• Income replacement rate adjustment is also an important change. The amendment also includes income replacement rate adjustments. The income replacement rate represents the ratio of pension benefits to the subscriber's average income. Under the current system, the income replacement rate was designed to gradually decrease to 40% by 2028. With this amendment, the income replacement rate will be set at 43%, 3 percentage points higher than planned. This can be seen as a compromise of the 'pay more, receive less' reform direction, but with a somewhat higher benefit level than initially expected. The 43% income replacement rate is still low by international standards, but this is explained as a decision considering the multi-layered old-age income security system, including the National Pension, Basic Pension, and Retirement Pension. Also, while the current system was designed to lower the income replacement rate by 0.5 percentage points annually, the amendment changes this by stopping this decrease and fixing it at 43%.

• Measures to strengthen support for vulnerable groups are also included. The amendment includes various measures to eliminate pension blind spots and strengthen support for vulnerable groups. First, military service credits have been expanded. Previously, only 6 months of military service period were recognized as pension enrollment period, but the amendment changes this to recognize the entire service period. Second, childbirth credits have also been strengthened. An additional 12 months of enrollment period is recognized from the first child, and 18 months each are recognized from the second child onwards. Third, insurance premium support for low-income regional subscribers has been reformed. The targets and levels of support have been expanded to alleviate the premium burden on self-employed individuals and regional subscribers with low incomes. Fourth, pension eligibility requirements have been relaxed. Measures are included to reduce cases where pensions cannot be received due to failure to meet minimum enrollment period requirements. These measures aim to strengthen the original purpose of the National Pension - addressing old-age poverty problems and strengthening the social safety net - while alleviating the burden of contribution rate increases.

📕 Background and Process of the Amendment

• Aging and low birth rates are the fundamental background of National Pension reform. The most fundamental background for pursuing this National Pension Act Amendment is the rapid aging and ultra-low birth rate phenomenon in Korean society. Korea is one of the countries where aging is progressing most rapidly in the world, with the proportion of elderly population aged 65 and over already exceeding 18% in 2025, entering an aged society. An even more serious problem is the decrease in birth rates, with the total fertility rate recording a world-lowest level of 0.72 in 2023. These demographic changes directly affect the financial stability of the National Pension. While pension recipients are rapidly increasing, the economically active population paying insurance premiums is decreasing, leading to a deepening imbalance in pension finances. If the current system is maintained, the National Pension fund is expected to be depleted around 2055, raising national concerns about the sustainability of the pension system. The issue of fairness between current and future generations was also an important consideration. Under the current system, there is a structural inequality where later generations pay more insurance premiums but receive reduced benefits, creating a need to address this at least partially.

• There were various positions surrounding National Pension reform. There were conflicting positions from various stakeholders regarding the direction of National Pension reform. First, the government viewed pension financial sustainability as the top priority and preferred a 'pay more, receive less' type of reform that simultaneously increases contribution rates and reduces income replacement rates. Second, the business community opposed the contribution rate increase, citing that corporate social insurance burdens are already excessive. They were particularly concerned that increasing the employer's share could negatively impact corporate competitiveness and employment. Third, labor groups and civil society organizations argued that the income replacement rate should be maintained at 45% or higher to guarantee adequate retirement income, and that insufficient resources should be supplemented by increasing contribution rates and expanding government support. Fourth, young people had high distrust about whether they would be able to receive pensions in their old age, and while agreeing on the need for reform, emphasized that intergenerational equity should be considered. Fifth, self-employed individuals and regional subscribers, who bear the entire premium themselves, demanded support measures to alleviate the increased burden from contribution rate increases.

• A compromise was reached through ruling and opposition party negotiations. This amendment was the result of a final compromise reached through National Assembly negotiations between ruling and opposition parties after discussing the government's original proposal and various alternatives. First, the contribution rate will be increased to 13% as in the government's original proposal, but the increase timing was adjusted to be delayed by 2 years each. This was a decision considering economic difficulties after COVID-19 and price increases. Second, the income replacement rate was decided at 43%, higher than the government's original proposal of 40%. This reflected some of the demands from labor groups and civil society organizations, reflecting the direction of strengthening the retirement income security function. Third, expansion of military service and childbirth credits, strengthening support for low-income groups, etc., were included as both ruling and opposition parties agreed on their necessity. Fourth, fund operation improvements and transparency enhancement measures for National Pension financial stabilization were also discussed together. Although this negotiation process was not easy, it is significant in that ruling and opposition parties achieved a political compromise based on a consensus on the urgency and necessity of National Pension reform. However, some criticize it as a 'patch-up reform' focused on political compromise rather than fundamental problem-solving.

Key Changes in the National Pension Amendment

1. Contribution Rate Increase: Current 9% → 13% (gradual increase until 2032)
   • 10% in 2026, 11% in 2028, 12% in 2030, 13% in 2032
   • Workers and employers each bear half
2. Income Replacement Rate Adjustment: 40% → adjusted upward to 43%
   • Current annual 0.5%p reduction stopped, fixed at 43%
3. Military Service Credit: 6 months → expanded to entire service period
4. Childbirth Credit: 12 months recognized from first child, 18 months from second child
5. Support for Low-Income Regional Subscribers: Expansion of support targets and levels
6. Fund Depletion Point: 2055 → 2064 (extended by about 9 years)
7. Implementation Date: From January 1, 2026
8. Transitional Measures: 43% income replacement rate applies to both current subscribers and recipients
9. Financial Impact: Additional income of about 340 trillion won over 30 years due to increased premium income
10. Burden Change: Based on a worker with monthly income of 3 million won, current 135,000 won per month → final 195,000 won

3️⃣ Impact and Issues of the National Pension Act Amendment

✅ Economic and Social Impact of the Amendment

• The amendment is expected to have various economic impacts. As this National Pension Act Amendment increases the burden on citizens and businesses through contribution rate increases, various economic impacts are expected. First, there is the increase in household burden and impact on consumption. For a worker with a monthly income of 3 million won, the premium burden will increase from the current 135,000 won per month to ultimately 195,000 won. This leads to a decrease in disposable income, which can have a short-term dampening effect on consumption. Second, there is an increase in corporate labor cost burden. As the employer's share of premiums also increases, corporate labor cost burdens increase. This burden may be particularly significant for small and medium-sized enterprises and small businesses. Third, there is financial pressure on self-employed individuals and regional subscribers. Self-employed individuals and regional subscribers who bear the entire premium themselves may experience a greater increase in burden, which could lead to avoiding enrollment or increased delinquency rates. Fourth, there is the expansion of the National Pension fund size and impact on the capital market. As the contribution rate increases, the National Pension fund size grows, and its influence in the domestic capital market is expected to expand further. Fifth, there is a long-term economic stabilization effect. Despite short-term burdens, the stabilization of the pension system can contribute to long-term economic stabilization through reduced anxiety about old age and strengthened social safety nets.

• Various social impacts are also expected. The National Pension Amendment is expected to affect not only the economy but also social structures and generational relationships. First, there is a change in intergenerational equity. The amendment is designed to somewhat alleviate the burden on future generations and reduce intergenerational imbalances, but the structural problem of later generations bearing a greater burden still remains. Second, there is an effect of alleviating old-age poverty. By setting the income replacement rate at 43%, higher than the previously planned 40%, the retirement income security function for pension recipients is expected to be somewhat strengthened. Third, there is securing the reliability of social security. It may have the effect of partially alleviating 'pension distrust,' which was particularly high among young people due to concerns about pension financial instability. Fourth, there is a role in addressing low birth rates. The expansion of childbirth credits strengthens the social compensation function for childbirth and child-rearing, which can function as part of the response to low birth rates. Fifth, there is strengthening social compensation for military service. The expansion of military service credits has the meaning of strengthening social compensation for fulfilling national defense duties. Sixth, there is a change in the sense of social solidarity. The pension system is based on solidarity between generations and classes, and it is necessary to pay attention to how this sense of social solidarity will change through this amendment.

✅ Issues and Evaluation of the Amendment

• Various criticisms and concerns are being raised about the amendment. Various criticisms and concerns are being raised about this National Pension Act Amendment. First, there is criticism that it is not a fundamental solution. Although this amendment extends the fund depletion point by 9 years, there is a point that it is not a fundamental solution in that the fund will eventually be depleted. Second, there is the issue of the appropriateness of the contribution burden. There are concerns that the 13% contribution rate exceeds the citizens' ability to bear, and it could be an even greater burden for low-income groups and self-employed individuals. Third, there is the insufficient resolution of intergenerational equity issues. Although the amendment has somewhat improved intergenerational equity issues, there is still criticism that later generations bear a greater burden. Fourth, there is uncertainty in the financial stabilization effect. There is a possibility that the expected financial effects may not be realized due to various variables such as population changes, economic growth rates, and employment situations. Fifth, there is criticism of the lack of government financial support. Some argue that the government should more actively share responsibility for pension finances. Sixth, there is the issue of transparency and efficiency in fund operation. As the fund size grows, the transparency and efficiency of operation become increasingly important, but there are criticisms that improvement measures for this are insufficient.

• Various suggestions for system improvement are being presented. Experts are making various suggestions to complement the limitations of the current amendment. First, the establishment of a comprehensive old-age income security system is necessary. There is an opinion that the multi-layered old-age income security system encompassing the National Pension, Basic Pension, Retirement Pension, and Individual Pension should be further strengthened. Second, efforts to eliminate National Pension blind spots must continue. Measures need to be prepared to expand pension enrollment for workers with various employment types such as non-regular workers, platform workers, and special type workers. Third, strengthening the expertise and transparency of fund operation is important. There is an argument that the independence of National Pension fund operation should be guaranteed and a transparent decision-making structure should be established. Fourth, clarification of government financial responsibility is necessary. There is an opinion that the state should clearly legally define its responsibility for pension finances and establish grounds for providing financial support when necessary. Fifth, the establishment of a continuous system check and adjustment mechanism is being proposed. It is suggested that a mechanism should be introduced to periodically check and automatically adjust the pension system according to changes in population structure and economic conditions. Sixth, the establishment of a social dialogue system for national consensus is necessary. It is suggested that an institutional framework should be prepared for this, as pension reform requires continuous social consensus from a long-term perspective.

✅ International Comparison and Implications

• There is much to learn from pension reform cases in other countries. Pension reform cases in various advanced countries that have faced aging earlier provide important implications for Korea. First, there is Sweden's automatic adjustment system. Through pension reform in 1998, Sweden introduced a 'Notional Defined Contribution (NDC)' method and automatic stabilization device. This is a system where pension benefits are automatically adjusted according to economic conditions and population changes, securing financial stability. Second, there is Germany's gradual reform approach. Germany has carried out pension reforms in several stages since 2001, seeking financial stabilization through various measures such as setting a ceiling on contribution rates, adjusting benefit formulas, and raising the eligibility age. Third, there is Japan's 'macroeconomic slide' system. Through pension reform in 2004, Japan introduced a system that automatically adjusts pension benefits according to population changes and economic conditions. Fourth, there is Canada's public pension fund operation model. The Canada Pension Plan Investment Board (CPPIB) is attracting attention as a fund operation model, achieving excellent investment performance based on independence and expertise. Fifth, there is the Netherlands' multi-layer pension system. The Netherlands has built a strong multi-layer system consisting of basic pensions, occupational pensions, and individual pensions, enhancing the stability of retirement income.

• Through international comparison, we can explore the direction of our country's pension reform. The implications that can be derived through international comparison are as follows. First, there is the need to introduce an automatic stabilization device. By introducing a mechanism where the pension system is automatically adjusted according to changes in population structure and economic environment, financial stability can be secured by escaping political influence. Second, there is the importance of strengthening a multi-layered old-age income security system. As it is difficult to guarantee sufficient retirement income with only public pensions, the multi-layered system including retirement pensions and individual pensions should be strengthened. Third, there is the need for gradual and predictable reform. Rather than abrupt changes, implementation should be carried out gradually from a long-term perspective, but predictability should be provided so that citizens can prepare in advance. Fourth, there is the importance of strengthening the independence and expertise of fund operation. A professional operation system independent from political influence is needed for stable and efficient operation of the National Pension fund. Fifth, there is the importance of the social consensus process. Since the success of pension reform is possible when based on broad participation and consensus of stakeholders, establishing a social dialogue system is important. It is necessary to build a pension system that ensures sustainable and adequate retirement income by applying these international experiences and implications to Korea's situation.

4️⃣ Related Terms Explanation

🔎 Contribution Rate

• The contribution rate is the ratio of insurance premiums to income that National Pension subscribers pay.
• Contribution rate refers to the ratio of how much of their income National Pension subscribers pay as insurance premiums. The current National Pension Act sets the contribution rate at 9%, and according to this amendment, it will be gradually increased to 13% by 2032. The application method of the contribution rate differs depending on the type of subscriber. For workplace subscribers (workers), half of the contribution rate, 4.5% (ultimately 6.5% after amendment), is borne by the worker, and the other half by the employer. Regional subscribers and voluntary subscribers bear the entire premium themselves. The premium is calculated by multiplying the subscriber's standard monthly income by the contribution rate, and the standard monthly income is based on actual income but has upper and lower limits. The contribution rate is a key factor determining the income of pension finances; when it increases, pension financial stability improves, but the burden on subscribers also increases. In international comparison, Korea's current 9% contribution rate is low among OECD countries, and even after the amendment to 13%, it is still low compared to Germany (18.6%) and Japan (18.3%). Although a contribution rate increase is a burden in the short term, it is evaluated as a necessary measure for the long-term sustainability of the pension system and the guarantee of retirement income.

🔎 Income Replacement Rate

• The income replacement rate is the ratio of pension benefits to the subscriber's average income.
• Income replacement rate refers to the ratio of pension receipts to pre-retirement income for National Pension subscribers. This is an important indicator showing the level of retirement income security, designed to gradually decrease to 40% by 2028 under the current system, but adjusted to 43% in this amendment. The income replacement rate calculation considers the average income of National Pension subscribers (A value) and the individual's lifetime average income (B value). The basic pension amount = (A value + B value) × income replacement rate × enrollment period/40 form of formula is applied, which is a combination of an equal part (A value) and an income-proportional part (B value). The income replacement rate is calculated based on 40 years of enrollment, so if the actual enrollment period is shorter, the actual income replacement rate will be lower. Korea's National Pension income replacement rate is lower than the OECD country average (about 52%), but the multi-layered system including Basic Pension and Retirement Pension should be considered. The income replacement rate and contribution rate are two axes of the pension system; a high income replacement rate increases retirement security but increases financial burden, while a low income replacement rate reduces financial burden but can increase the risk of old-age poverty, making appropriate balance important.

🔎 Credit System

• The credit system is a system that additionally recognizes pension enrollment periods for socially valuable activities.
• The credit system refers to a system that recognizes certain periods as pension enrollment periods for socially valuable specific activities or situations, even if insurance premiums were not actually paid. This is a device to eliminate pension blind spots and increase social equity. Major credit systems operated by the National Pension include: First, military service credit. National Pension subscribers who have fulfilled military service duty are additionally recognized for their service period (currently maximum 6 months, entire period after amendment) as enrollment period. Second, childbirth credit. Additional enrollment periods are recognized for National Pension subscribers who have given birth to or adopted 2 or more children, and in the amendment, this is expanded to apply from the first child. Third, unemployment credit. When unemployment benefit recipients bear part of the insurance premium, that period is recognized as pension enrollment period. The credit system operates in a way where the state and subscribers share the insurance premium burden, and through this, the negative impact of career breaks due to military service, childbirth, unemployment, etc., on retirement income can be alleviated. Internationally, many countries operate various forms of credit systems, and Korea's credit system is gradually expanding. The credit expansion in this amendment has the meaning of recognizing the social value of childbirth and military service and strengthening the retirement income security of related subscribers.

5️⃣ Frequently Asked Questions (FAQ)

Q: When will the National Pension contribution rate increase be applied?

A: The National Pension contribution rate increase will be applied gradually from January 1, 2026. The specific increase schedule is as follows. First, from January 1, 2026, it will be increased by 1 percentage point from the current 9% to 10%. Workers and employers will each bear 5%, and regional subscribers and voluntary subscribers will bear the entire 10% themselves. Second, from January 1, 2028, it will be further increased to 11%. The burden on workers and employers will be 5.5% each. Third, from January 1, 2030, it will be increased to 12%. The burden on workers and employers will be 6% each. Fourth, from January 1, 2032, it will ultimately be applied at 13%. The burden on workers and employers will be 6.5% each. This gradual increase of 1 percentage point every 2 years was chosen to alleviate a sudden increase in burden and provide time for subscribers and employers to adapt. The increased contribution rate applies to periods after the respective points and is not retroactively applied to past premiums already paid. As premiums are calculated monthly, the new contribution rate applies from the corresponding month of each increase point. For low-income regional subscribers, as premium support is expanded, the actual increase in burden may vary depending on the level of support.

Q: How will pensions be paid if the National Pension fund is depleted?

A: Even if the National Pension fund is depleted, pension payments will not be completely discontinued. However, changes may occur in the payment method and level. First, a transition to a pay-as-you-go system will take place. Currently, the National Pension is operated in a form that mixes funded and pay-as-you-go systems, but when the fund is depleted, it will transition to a complete pay-as-you-go system. A pay-as-you-go system means paying that year's pensions with premiums collected that year. Second, pensions will be paid within the limits of premium income. After the fund is depleted, pensions can only be paid within the limits of premium income collected in that fiscal year. This means that as the working generation decreases due to population aging, pension payment amounts may also decrease. Third, adjustments to benefit levels may become inevitable. If premium income falls short of expenditure, adjustments such as lowering benefit levels or raising payment ages may be necessary. Fourth, government financial support may be needed. If it is difficult to cover benefits with premium income alone after fund depletion, there is a possibility that the government will need to support the shortfall from the general budget. To prepare for this possibility, the government is pursuing reforms such as contribution rate increases to delay the fund depletion point and secure financial stability. There is also a provision in the National Pension Act (Article 101 of the National Pension Act) that the state ultimately guarantees pension benefit payments, so fund depletion will not immediately lead to non-payment of pensions. However, for stable retirement income security, it is important to prepare various retirement preparations such as individual pensions and retirement pensions along with the National Pension.

Q: What are the differences between the National Pension and the Basic Pension?

A: The National Pension and Basic Pension are systems to guarantee retirement income, but they have several differences in purpose, target, financial resources, benefit level, etc. First, they have different purposes and natures. The National Pension is a social insurance system that pays pensions in retirement proportional to income during the working period, while the Basic Pension is a public assistance-natured system that pays to elderly people below a certain income level to alleviate elderly poverty. Second, they have different application targets. The National Pension is a system that citizens aged 18 to under 60 must mandatorily enroll in, and benefits are determined according to premium payment history. In contrast, the Basic Pension is paid to those among the elderly aged 65 and over whose income and assets are in the lower 70%. Third, they have different funding methods. The National Pension uses insurance premiums paid by subscribers and employers as the main financial resources and accumulates and operates funds. The Basic Pension is funded entirely by government budget (national and local funds). Fourth, they have different benefit levels and calculation methods. The National Pension benefit amount is determined by the enrollment period and income level, targeting an average income replacement rate of 43%. The Basic Pension is a maximum of 331,650 won per month as of 2024, adjusted according to price increases. Fifth, they have different eligibility and payment periods. The National Pension requires a minimum of 10 years of premium payment to become eligible and is paid until the death of the recipient. The Basic Pension is paid to targets selected through income and asset investigation, with eligibility reassessed annually. These two systems have a complementary relationship and work together to solve elderly poverty problems and increase retirement income stability. However, elderly people who receive large amounts from the National Pension may have their Basic Pension reduced or not receive it at all, so the benefits of the two systems may vary depending on individual circumstances.

Q: What happens if I don't pay National Pension premiums?

A: If you do not pay National Pension insurance premiums, there can be various disadvantages and impacts. First, it becomes difficult to acquire pension eligibility. The National Pension requires a minimum of 10 years (120 months) of premium payment to qualify for old-age pension. If you don't pay premiums, you may not meet this minimum enrollment period and may not be able to receive a pension. Second, the pension receipt amount decreases. As the pension amount is determined in proportion to the enrollment period and income level, the more periods you don't pay, the less pension you will receive in the future. Third, additional burdens due to delinquency occur. If you do not pay premiums by the deadline, late fees (1.2% per month depending on the delinquency period) are imposed, increasing financial burden. Fourth, forced collection measures may be taken. In case of long-term delinquency, the National Pension Service can proceed with forced collection procedures such as property seizure and public sale. Fifth, it can negatively impact credit. Delinquency information may be provided to credit information agencies, affecting creditworthiness. Sixth, you may not receive protection in case of disability or death. The National Pension provides protection such as disability pension and survivor pension in addition to old-age pension, but without premium payment history, it is difficult to receive such protection. However, if there are economic difficulties, you can utilize systems such as premium payment exemption, payment deferment, and installment payment. There is also a premium support system for low-income regional subscribers, so it is good to consult with the National Pension Service to find a method suitable for your situation. In the long term, it is important to consistently pay premiums within possible ranges for retirement income security.