🚨 National Pension Auto-Adjustment Mechanism: Pension System Sustainability and Intergenerational Burden

Today Korean Social News | 2025.05.01

📌 With National Pension Auto-Adjustment Mechanism Introduction, Youth Pension Could Decrease Up to 16%

💬 Analysis shows that if the government introduces an auto-adjustment mechanism for the National Pension from 2036, future pension payments for people currently in their 20s-50s could decrease by up to 16%. This measure would automatically adjust contribution rates and income replacement rates according to demographic and economic indicators to improve pension sustainability. However, some politicians have criticized the potential reduction in pension payments for younger generations.

Summary

• The National Pension auto-adjustment mechanism automatically adjusts contributions and pension amounts based on population and economic conditions.
• It is being discussed as a solution to ensure the sustainability of pension finances worsening due to low birth rates and aging population.
• While improving pension system stability, concerns exist about reduced benefits for future generations, raising issues of intergenerational fairness.

1️⃣ Definition

National Pension auto-adjustment mechanism refers to a system that automatically adjusts pension contribution rates and benefit levels according to changes in demographic structure and economic conditions. Simply put, it's a mechanism that automatically increases contributions or reduces pension amounts when aging intensifies or economic growth slows down.

This represents a systematic approach to maintain pension system financial health without political debate.

💡 Why is this important?

• The National Pension fund is expected to be depleted by around 2057 if the current system continues.
• Due to low birth rates and aging population, the structural problem is worsening with fewer contributors and more recipients.
• Without measures now, the burden on future generations could increase dramatically.

2️⃣ Types and Characteristics of Auto-Adjustment Mechanisms

📕 Main Types of Auto-Adjustment Mechanisms

• Contribution rate auto-adjustment adjusts payment amounts based on financial situation. Contribution rate auto-adjustment automatically adjusts the contribution rate paid by participants according to pension finance conditions or demographic changes.

  • The current National Pension contribution rate is 9% of income, but with an auto-adjustment mechanism, rates could gradually increase.
  • Japan increased its pension contribution rate from 13.58% in 2004 by 0.354% annually until fixing it at 18.3% in 2017.
  • This method stabilizes pension finances but increases the burden on the current working population.

• Benefit level auto-adjustment adjusts recipients' pension amounts. Benefit level auto-adjustment automatically adjusts benefit amounts or income replacement rates (pension amount relative to lifetime average income) according to economic and demographic conditions.

  • The current income replacement rate for the National Pension is about 43% based on 40 years of participation, but this percentage could decrease with an auto-adjustment mechanism.
  • Sweden adjusts pension amounts through an "automatic balancing mechanism" reflecting economic growth rates and demographic changes.
  • This method effectively stabilizes pension finances but raises concerns about weakened retirement income security.

• Eligibility age auto-adjustment adjusts the age when people start receiving pensions. Eligibility age auto-adjustment automatically delays the starting age for pension recipients as life expectancy increases.

  • The current National Pension eligibility age is 65, but with an auto-adjustment mechanism, it could gradually increase.
  • Countries like the UK and Netherlands operate systems that automatically adjust pension eligibility age linked to life expectancy increases.
  • This approach maintains an appropriate pension receipt period to ease financial burden but may create gaps with actual retirement age depending on labor market conditions.

📕 Advantages and Disadvantages of Auto-Adjustment Mechanisms

• Auto-adjustment mechanisms increase pension system sustainability. The biggest advantage of auto-adjustment mechanisms is improving the financial sustainability of the pension system.

  • First, it responds promptly through automatic adjustments based on objective indicators without political intervention.
  • Second, it minimizes shock and resistance from sudden reforms through gradual changes.
  • Third, it can partially improve intergenerational equity by preventing excessive burden transfer to future generations.

• However, concerns exist about weakened retirement income security. The disadvantages of auto-adjustment mechanisms include potential weakening of the basic purpose of pensions - securing retirement income.

  • First, benefit level reductions could worsen elderly poverty issues.
  • Second, it may have a greater impact on low-income or vulnerable groups, raising social equity concerns.
  • Third, it could weaken public trust and support for the pension system, possibly leading to pension participation avoidance.

Key Types and Characteristics of National Pension Auto-Adjustment Mechanisms

1. Contribution rate auto-adjustment: Automatically adjusts contribution rates according to economic and demographic indicators (potentially increasing from current 9%)
2. Benefit level auto-adjustment: Automatically adjusts income replacement rate according to environmental changes (potentially decreasing from current 43%)
3. Eligibility age auto-adjustment: Automatically adjusts pension starting age according to life expectancy increases (potentially increasing from current 65)
4. Advantages: Secures pension system financial sustainability, minimizes political influence, reduces shock through gradual changes
5. Disadvantages: Weakens retirement income security function, unfavorable impact on vulnerable groups, potential reduction in pension system trust

3️⃣ International Cases and Domestic Implementation Discussions

✅ Major Countries' Auto-Adjustment Mechanism Operation Cases

• Sweden stabilized its pension system through an "automatic balancing mechanism." Sweden introduced an automatic balancing mechanism along with a "Notional Defined Contribution (NDC)" system through pension reform in 1998.

  • Sweden's automatic balancing mechanism calculates the ratio between pension assets (future contributions + reserves) and pension liabilities (expected future payments), automatically reducing benefits when the balance index falls below 1.
  • After the 2008 financial crisis, the balance index fell to 0.9672, resulting in a 3.28% decrease in pension amounts, which were gradually adjusted as the economy recovered.
  • Sweden's case demonstrates the advantage of flexible response to economic conditions but also revealed instability due to benefit volatility.

• Japan implemented gradual adjustments through a "macroeconomic slide." Japan introduced an automatic adjustment mechanism called "macroeconomic slide" through pension reform in 2004.

  • Japan's automatic adjustment mechanism subtracts an "adjustment rate" (labor force decrease rate + life expectancy increase rate) when adjusting pension amounts according to price or wage increases.
  • The contribution rate increased from 13.58% by 0.354% annually until fixed at 18.3% in 2017.
  • Japan's case has the advantage of reducing shock through gradual adjustment, but during deflation periods, pension amount adjustments were postponed, delaying financial improvement effects.

✅ Domestic Implementation Discussions and Issues

• Auto-adjustment mechanism implementation has become a major issue in pension reform. Currently, auto-adjustment mechanism implementation is being actively discussed in response to National Pension finance deterioration forecasts.

  • The government is considering introducing an auto-adjustment mechanism from 2036, proposing a plan combining contribution rate increases and benefit level adjustments.
  • According to the 5th National Pension financial calculation, the National Pension fund is expected to be depleted around 2057 if the current system continues.
  • Experts point out that pension reform through social consensus is urgent, and an auto-adjustment mechanism could be part of this.

• Intergenerational equity and retirement income security are key issues. The biggest issue surrounding auto-adjustment mechanism implementation is balancing intergenerational equity and adequate retirement income security.

  • Some worry that an auto-adjustment mechanism could excessively reduce future generations' pension benefits. Recent analysis suggests pension amounts for people currently in their 20s-30s could decrease by up to 16%.
  • However, others argue that without action now, future generations' contribution burden will increase even more.
  • Political opinions are divided on the auto-adjustment mechanism, with some arguing for priority establishment of a multi-layered retirement income security system, including strengthening the basic pension.

4️⃣ Related Terms Explanation

🔎 Income Replacement Rate

• Income replacement rate shows what percentage of working-age income is received as pension income in retirement.
• Income replacement rate refers to the ratio of pension income after retirement compared to pre-retirement income. Simply put, it indicates what percentage of your monthly salary you'll receive as pension.
• The National Pension income replacement rate is currently about 43% based on 40 years of participation, meaning recipients get 43% of their lifetime average income as pension.
• The OECD recommends a 70-80% income replacement rate for adequate retirement income, typically achieved through multi-layered pension systems including National Pension, retirement pension, and private pensions. With an auto-adjustment mechanism, the income replacement rate could decrease further, raising concerns about retirement income security.

🔎 Fund Depletion

• Fund depletion refers to the complete exhaustion of reserves for pension payments.
• Fund depletion means the situation where funds accumulated for National Pension benefit payments are completely used up. The National Pension currently operates under a partially funded system, where part of contributions from participants goes to current pension recipients, and the rest is accumulated as funds.
• According to the 5th National Pension financial calculation, if the current system continues, the National Pension fund is expected to reach its maximum size in the late 2040s and then rapidly decrease until depletion around 2057.
• When funds are depleted, pensions must be paid solely through contributions from participants at that time, which could require extreme measures like dramatically increasing contribution rates or substantially reducing benefit levels. The auto-adjustment mechanism is being discussed as a way to delay fund depletion or reduce the shock after depletion.

🔎 Intergenerational Equity

• Intergenerational equity refers to the balance of benefits and burdens different generations receive from the pension system.
• Intergenerational equity is a concept indicating whether the balance of costs and benefits for each generation in the pension system is fair. Since the National Pension is based on intergenerational support, intergenerational equity issues are important.
• The current National Pension has a structural imbalance where early participants receive relatively high benefits compared to their low contributions, while future generations will receive lower benefits despite higher contributions.
• Due to low birth rates and aging population, this imbalance could intensify as the working generation paying for pensions decreases while the elderly generation receiving pensions increases. The auto-adjustment mechanism aims partly to reduce this intergenerational imbalance and prevent excessive burden transfer to future generations, though concerns about reduced benefits for younger generations have been raised.

5️⃣ Frequently Asked Questions (FAQ)

Q: How much will my pension amount decrease if an auto-adjustment mechanism is introduced?

A: Pension amount changes due to auto-adjustment mechanism implementation vary by age group and implementation method. According to recent analysis, if an auto-adjustment mechanism is introduced from 2036, pension amounts for people currently in their 20s-30s could decrease by up to 16%. Those in their 40s-50s are expected to be less affected, while those 60 and older who are already receiving pensions or close to eligibility are unlikely to be affected much. However, the specific reduction depends on what type of auto-adjustment mechanism is introduced and how economic growth and demographic changes progress. To prepare for pension reduction, it's important to strengthen additional retirement preparation through private pensions or retirement pensions, and the government needs to simultaneously pursue policies to strengthen the multi-layered retirement income security system.

Q: Are there other ways to increase National Pension sustainability besides introducing an auto-adjustment mechanism?

A: There are several ways to increase National Pension sustainability besides auto-adjustment mechanisms. First, gradually increasing the National Pension contribution rate. Raising the current 9% contribution rate gradually to 12-13% could significantly delay fund depletion. Second, expanding participation by resolving National Pension blind spots. There are currently many people effectively not enrolled in pensions, including exemption recipients, long-term delinquents, and exclusion subjects - including them in the system would increase contribution income in the short term. Third, improving fund operation returns. Diversifying National Pension fund investments and efficient management to increase returns could delay fund depletion. Fourth, strengthening the multi-layered retirement income security system. Strengthening other retirement income sources like basic pension, retirement pension, and private pension to reduce dependence on the National Pension. These measures should be comprehensively considered along with auto-adjustment mechanisms to achieve a balanced approach to the dual goals of National Pension sustainability and retirement income security.