🚨 National Pension Income Replacement Rate: 43% in 2025 Explained

Today Korean Social News | 2025.04.08

📌 Pension Reform, Controversy Over Generational Return Rate Gap... Growing Discontent Among Young People

💬 With the recent National Pension Act amendment, the contribution rate has been increased from 9% to 13%, and the income replacement rate has been raised from 40% to 43%. As a result, there are differences in pension return rates by generation, with those born in 1976 receiving 2.6 times their contributions, while those born in 2006 will receive only 1.68 times, causing growing discontent among younger generations. The government is considering additional reforms, including raising the mandatory enrollment age.

Summary

• The income replacement rate is the ratio of pension benefits to pre-retirement average income, an important indicator of retirement income security.
• The National Pension income replacement rate has recently been raised from 40% to 43%, but the actual perceived replacement rate varies depending on the contribution period.
• Designing the income replacement rate must consider various factors including contribution burden, fund stability, and intergenerational equity.

1️⃣ Definition

Income replacement rate refers to the ratio of pension benefits received after retirement compared to the average income received by workers before retirement. Simply put, it indicates what percentage of your working salary you will receive as pension.

For example, if the income replacement rate is 43%, a person who had a monthly average income of 3 million won during their working years would receive approximately 1.29 million won (43% of 3 million won) as pension after retirement.

💡 Why is it important?

• The income replacement rate is an important indicator for determining whether one can maintain their standard of living after retirement.
• It is a key criterion for evaluating the security and sustainability of national pension policies.
• It is one of the most sensitive and important issues in National Pension reform discussions.

2️⃣ Understanding Income Replacement Rates and Current Status

📕 Structure and Calculation Method of Income Replacement Rate

• The income replacement rate is calculated considering various factors. The National Pension income replacement rate is not simply a comparison between the last monthly salary before retirement and the pension amount. First, the National Pension income replacement rate is based on the participant's lifetime average income. In other words, it compares the average income throughout the working period with the pension amount. Second, the National Pension consists of an equal part (A value) and an income-proportional part (B value). A value represents the average income of all participants, while B value represents an individual's lifetime average income, and the pension amount is determined by considering both factors. Third, the income replacement rate is based on 40 years of contribution. If the contribution period is shorter than 40 years, the actual perceived income replacement rate will be lower. For example, if you contributed for only 20 years, the income replacement rate would be about half of the standard.

• Understanding the income replacement rate calculation formula helps predict pension amounts. The National Pension amount is calculated using the following formula: Pension amount = (A value + B value) × income replacement rate × contribution period/40 years. Here, A value is the average income of all participants, and B value is your lifetime average income. The characteristics of this formula are as follows: First, it has an income redistribution effect. Lower-income groups receive more pension than the contributions they made, while higher-income groups receive relatively less. Second, the contribution period is important. Even with the same income, the longer the contribution period, the more pension one receives. Third, the actual perceived income replacement rate varies from person to person. It can vary depending on income level, contribution period, inflation rate, and other factors.

📕 Domestic and International Income Replacement Rate Status and Comparison

• There have been changes in Korea's National Pension income replacement rate. The National Pension income replacement rate has changed several times since the system was introduced. First, when the system was introduced in 1988, the income replacement rate was 70%. Second, it was lowered to 60% with the first pension reform in 1998. Third, the second pension reform in 2007 lowered the income replacement rate to 50% and designed it to decrease by 0.5 percentage points annually to reach 40% by 2028. Fourth, with the recent 2025 amendment, the income replacement rate has been adjusted upward to 43%. These changes were part of efforts to balance fund financial stability and retirement income security.

• What is the position of Korea's income replacement rate in international comparison? When compared with OECD countries, Korea's income replacement rate has the following characteristics: First, the OECD average public pension income replacement rate is about 52%, which is higher than Korea's 43%. Second, countries with high income replacement rates include Italy (82%), Austria (78%), and Spain (72%). Third, countries with low income replacement rates include the UK (28%), Japan (32%), and the US (40%). Fourth, direct comparison is difficult. This is because each country has different pension system structures, levels of private pension development, and other retirement income security systems. Fifth, multi-tier pension systems are important. It is more meaningful to compare comprehensive income replacement rates considering public pensions (National Pension), semi-public pensions (retirement pensions), and private pensions (personal pensions).

Key Figures Related to Income Replacement Rate

1. Current National Pension income replacement rate: 43% (after 2025 amendment)
2. OECD average public pension income replacement rate: Approximately 52%
3. Recommended adequate retirement income replacement rate: 70~80% (OECD recommendation)
4. Actual average National Pension contribution period: About 25 years (62.5% of the 40-year contribution standard income replacement rate)
5. Generational pension return rates: 2.6 times for those born in 1976, 1.68 times for those born in 2006
6. Maximum Basic Pension benefit: 330,000 won per month (as of 2024)
7. National Pension eligibility age: 65 years (gradual increase completed)
8. Number of National Pension participants: Approximately 23 million
9. Number of National Pension recipients: Approximately 6 million
10. National Pension fund size: Approximately 1,000 trillion won (as of 2025)

3️⃣ Issues and Impacts of Income Replacement Rates

✅ Key Issues Surrounding Income Replacement Rates

• There is debate about the appropriate income replacement rate level. Various opinions conflict regarding the appropriate income replacement rate for the National Pension. First, from a retirement income security perspective, a higher income replacement rate is needed. The OECD recommends a comprehensive income replacement rate of 70-80% for adequate retirement income, and there is an argument that public pensions should account for a significant portion of this. Second, from a financial stability perspective, caution is needed when increasing the income replacement rate. As pension expenditures increase while revenues decrease due to aging, raising the income replacement rate could accelerate fund depletion. Third, there is also debate from an intergenerational equity perspective. In the current pension structure, later generations pay more contributions but have a lower return rate (ratio of benefits to contributions), creating an intergenerational imbalance.

• Intergenerational equity is an important issue. Intergenerational equity issues related to income replacement rates arise in the following situations: First, the structure favors early participants. Early National Pension participants contribute for a relatively short period but receive pensions for a long period, resulting in a high return rate. Second, the burden on later generations inevitably increases. Due to aging, later generations face higher contribution rates while having greater uncertainty about their benefits due to the risk of fund depletion. Third, there is a large gap in return rates. Current 50-year-olds are expected to receive more than 2.5 times their contributions, while 20-year-olds are expected to receive only about 1.7 times. Fourth, there are generational differences in reform preferences. Older generations tend to prioritize increasing the income replacement rate, while younger generations tend to prioritize reducing contribution burdens or stabilizing the fund.

✅ Impact of Income Replacement Rates on Individuals and Society

• Changes in income replacement rates directly affect retirement preparation. Changes in income replacement rates affect individuals' retirement preparation methods in the following ways: First, the degree of retirement preparation burden changes. A higher income replacement rate allows more reliance on public pensions, while a lower rate necessitates additional individual retirement preparation. Second, it affects decisions to join private pensions. If the National Pension income replacement rate is perceived as low, there is a tendency to more actively join personal pensions or retirement pensions. Third, it also affects retirement timing decisions. If the income replacement rate is perceived as low, people may work longer or consider re-employment after retirement. Fourth, saving and investment patterns change. If sufficient retirement income from pensions is difficult to expect, people will pursue more active asset formation.

• Income replacement rates also affect national economy and social stability. The level of income replacement rates affects not only individuals but also society as a whole in the following ways: First, it directly relates to elderly poverty rates. Maintaining an adequate income replacement rate helps alleviate elderly poverty issues and strengthens the social safety net. Second, it affects consumption and economic vitality. Stable income for retirees maintains consumption, positively affecting the domestic economy. Third, it can be a factor in intergenerational conflict. Imbalances between income replacement rates and contribution rates can cause intergenerational conflicts, which may hinder social integration. Fourth, it has a significant impact on national finances. High income replacement rates can burden pension finances in the long term, eventually expanding into national financial issues.

✅ Recent Pension Reform and Future Outlook

• Let's look at the main contents of the recent pension reform. With the National Pension Act amendment passed in early 2025, there have been important changes to the pension system. First, a contribution rate increase has been decided. It will gradually increase from the current 9% to 13% by 2032. Second, the income replacement rate has been adjusted upward. According to the original plan, it was to decrease to 40% by 2028, but it has been adjusted to 43%. Third, credit systems have been expanded. Military service credits now cover the entire service period, and childbirth credits now apply from the first child. Fourth, support for low-income groups has been strengthened. Contribution support for low-income local subscribers has been expanded. Fifth, the fund depletion time has been extended. This reform is expected to extend the fund depletion time from 2055 to 2064, about 9 years later.

• What direction will future discussions on income replacement rates take? Despite this reform, discussions on the sustainability and adequacy of the National Pension are expected to continue. First, there is the possibility of introducing an automatic adjustment mechanism. A system that automatically adjusts income replacement rates and contribution rates according to demographic structure and economic conditions may be considered. Second, strengthening the multi-tier retirement income security system is necessary. A comprehensive retirement income security strategy including Basic Pension, retirement pensions, and personal pensions in addition to the National Pension will become more important. Third, there may be discussions on adjusting the benefit eligibility age. As life expectancy increases, raising the pension eligibility age may be considered. Fourth, measures to improve intergenerational equity will be sought. Various alternatives to reduce the gap in intergenerational return rates are expected to be discussed. Fifth, there is a possibility of adjusting the contribution ceiling. Adjusting the income ceiling to make high-income groups' contribution burdens more realistic may be considered.

4️⃣ Related Terminology

🔎 Pension Return Rate

• The pension return rate is the ratio of the total pension amount received to the contributions paid.
• The pension return rate refers to the ratio of the expected total pension amount to be received relative to the total contributions paid to the National Pension. Simply put, it is an indicator of "how much return you get on your investment" in the pension. For example, if the return rate is 2.0, it means you receive twice the amount of contributions as pension. The return rate varies depending on when you joined, contribution period, income level, and life expectancy. Generally, earlier participants, lower-income groups, and women (due to longer life expectancy) tend to have higher return rates. The current average return rate is about 1.8 times, but there are significant differences by generation. Those born in the 1970s are expected to receive more than 2.5 times, while those born in the 2000s are expected to receive about 1.7 times. This generational gap in return rates is an important element in debates about the sustainability and fairness of the pension system.

🔎 Basic Pension

• The Basic Pension is a supplementary pension system for low-income elderly people aged 65 and over.
• The Basic Pension is a public pension provided to seniors aged 65 and over in the lower 70% income and asset bracket. Unlike the National Pension, no contributions are required, and eligibility is determined through income and asset tests. As of 2024, a maximum of 330,000 won per month (530,000 won for couple households) is paid, and the Basic Pension amount may be reduced depending on the National Pension benefit amount. The Basic Pension aims primarily to alleviate elderly poverty and complements the low income replacement rate and blind spots of the National Pension. If the National Pension is based on insurance principles, the Basic Pension can be said to be based on welfare principles. The Basic Pension is funded entirely by government budget (national and local funds) and is adjusted annually according to inflation. Considering the income replacement rate of "public pensions" combining the National Pension and Basic Pension is necessary to understand the actual level of retirement income security.

🔎 Retirement Pension

• Retirement pension is a pension system where companies accumulate funds for workers' retirement income security.
• Retirement pension is a system where companies accumulate a certain portion of an employee's salary during their tenure and pay it in the form of a pension or lump sum upon retirement. This replaces the existing retirement allowance system and was introduced in 2005. There are various types of retirement pensions, including Defined Benefit (DB), Defined Contribution (DC), and Individual Retirement Pension (IRP). By law, companies must accumulate at least 1/12 of an employee's annual total wages as a retirement pension. This has an additional income replacement rate effect of about 8.3%. Retirement pensions form an important pillar of retirement income along with the National Pension, and the OECD recommends an income replacement rate of at least 60% combining public pensions and retirement pensions. However, in reality, there are blind spots as the retirement pension enrollment rate is low for small and medium-sized enterprises and non-regular workers. Retirement pensions offer tax benefits, and recently, policies to encourage receiving retirement pensions in the form of annuities have been strengthened.

5️⃣ Frequently Asked Questions (FAQ)

Q: Can the actual perceived income replacement rate be lower than 43%?

A: Yes, the actual perceived income replacement rate is likely to be lower than 43%. The reasons are as follows: First, 43% is based on 40 years of contribution. Realistically, most people find it difficult to contribute to the National Pension for 40 years. The current average National Pension contribution period is about 25 years, in which case the actual income replacement rate is about 27% (43% × 25÷40). Second, career breaks and unemployment periods have an impact. If there are gaps in contributions due to job preparation, childcare, or unemployment, the income replacement rate will be lower. Third, the perceived income replacement rate varies by income level. Lower-income groups may perceive a higher income replacement rate than 43% due to the income redistribution effect, but higher-income groups may perceive a lower rate. Fourth, inflation must also be considered. Pension amounts are adjusted linked to inflation, but in terms of actual purchasing power, the perceived income replacement rate may decrease over time. Therefore, it is important to plan for additional retirement preparation according to individual circumstances to approach the appropriate income replacement rate (OECD recommendation of 70-80%).

Q: What level is the 43% income replacement rate internationally?

A: Korea's National Pension income replacement rate of 43% is in the lower-middle range internationally. The OECD countries' average public pension income replacement rate is about 52%, which is about 9 percentage points higher than Korea's. Comparing the income replacement rates of developed countries, Southern European countries such as Italy (82%), Austria (78%), and Portugal (74%) are high, while Anglo-American countries such as the UK (28%), Japan (32%), and the US (40%) are low. Germany (43%) and Sweden (42%) are at similar levels to Korea. However, caution is needed in simple comparisons. First, the structure of pension systems differs by country. There are various forms of public retirement security systems besides public pensions, such as basic pensions and mandatory retirement pensions. Second, the development of private pensions (retirement pensions, personal pensions) must also be considered. Anglo-American countries with low income replacement rates have developed private pensions, so their comprehensive retirement income security level may be higher. Third, the pension eligibility age and life expectancy should also be considered together. If the eligibility age is low or life expectancy is long, the total benefit amount will differ even with the same income replacement rate. Korea's public pension income replacement rate is on the low side, but it improves slightly when combined with retirement pensions (8.3%) and the Basic Pension. However, it still falls short of the OECD recommendation (70-80%), so additional retirement preparation through personal pensions or asset formation is necessary.

Q: Do younger generations lose out with the National Pension?

A: It is difficult to definitively say that younger generations "lose out" with the National Pension, but it is true that there is a gap in return rates between generations. The background of the dissatisfaction felt by people in their 20s and 30s is as follows: First, there are differences in return rates by generation. Those born in the 1970s are expected to receive more than 2.5 times their contributions, while those born in the 2000s are expected to receive only about 1.7 times. Second, there is a structure where contribution rates increase but benefits decrease. Early participants applied a 70% income replacement rate with a 9% contribution rate, but the current young generation will apply a 43% income replacement rate with a 13% contribution rate. Third, there is concern about fund depletion. Under the current system, the fund is expected to be depleted around 2064, and the generation that will receive pensions at that time is the current young people.

However, the following points should also be considered: First, a return rate exceeding 1 is still a "gain." Even at 1.7 times, it means receiving more than the amount contributed. Second, there is value as social insurance. The National Pension is not just savings but social insurance that prepares for risks such as old age, disability, and death. Third, there is an income redistribution effect. Lower-income groups can expect a relatively higher return rate. Fourth, the state has the final responsibility for payment. Even if the fund is depleted, the state guarantees pension payments (Article 101 of the National Pension Act). In conclusion, while younger generations have relatively unfavorable conditions, the National Pension is still an important means of retirement income security, so it is advisable to actively enroll and supplement the shortfall with additional retirement preparation.

Q: What can individuals do to increase their income replacement rate?

A: You can use the following methods to increase the actual income replacement rate of the National Pension and secure sufficient retirement income: First, maximize your National Pension contribution period. Since the income replacement rate is proportional to the contribution period, it is important to join as early as possible and maintain it as long as possible. Using the voluntary continued contribution system, you can continue to contribute until age 65 even after age 60. Second, utilize the additional payment system. If you have periods of contribution exemption, you can increase your contribution period through subsequent payments. Third, utilize credit systems. By applying for credits for military service, childbirth, and unemployment periods, you can have additional contribution periods recognized. Fourth, adjust your pension receipt timing. Delaying the receipt time (up to 5 years) increases the pension amount. It increases by 7.2% each year, so after 5 years, you can receive 36% more pension.

In addition to the National Pension, consider the following methods for comprehensive retirement preparation: First, actively utilize retirement pensions. Refrain from interim withdrawals and, if possible, it is advantageous to receive it in the form of a pension rather than a lump sum. Second, join personal pensions. You can secure additional pension income while receiving tax benefits. Third, consider housing pensions (reverse mortgages). If you own a home, you can secure a retirement income source utilizing it. Fourth, engage in active asset formation. Prepare retirement funds through diversified investments in various assets such as deposits, stocks, and real estate. Fifth, prepare for post-retirement jobs or businesses. If health permits, plan in advance ways to earn income even after retirement. Through such multi-layered retirement preparation, you can approach the comprehensive income replacement rate of 70-80% recommended by the OECD.