🚨 Retirement Pension: Retirement Income Security and System Improvement Plans

Today Korean Social News | 2025.06.17

📌 Retirement Pension Returns Only 2% Over 10 Years… Poor Performance for Retirement Preparation

💬 Analysis shows that the 10-year average return on retirement pensions was only 2.07%, which is barely keeping up with inflation. According to a National Pension Research Institute report, low returns and early withdrawal problems mean retirement pensions are not properly serving their role of guaranteeing retirement income. The report emphasizes the need for system improvements, particularly transitioning from Defined Benefit (DB) to Defined Contribution (DC) plans and expanding fund-type systems. While retirement pension assets now exceed 300 trillion won, their actual effectiveness for retirement preparation falls short of expectations.

Summary

• Retirement pensions are a pension system designed to secure workers' retirement income.
• They are divided into Defined Benefit (DB), Defined Contribution (DC), and Individual Retirement Pension (IRP) types.
• System improvements are urgent due to low returns and early withdrawal problems.

1️⃣ Definition

Retirement pension means a retirement income security system that allows workers to receive their retirement money in monthly pension payments instead of a lump sum when they retire. This system was introduced in 2005 to supplement the existing retirement allowance system and help workers prepare for a stable retirement.

Retirement pensions form a two-layer structure for retirement income security in Korea together with the National Pension, and serve as a core pillar of the three-layer pension system along with personal pensions.

💡 Why is it important?

• It supplements retirement income that the National Pension alone cannot provide.
• It prevents spending retirement money as a lump sum and increases retirement preparation effectiveness.
• It provides opportunities for asset growth through long-term investment.
• It supports retirement preparation through tax benefits.

2️⃣ Types and Features of Retirement Pensions

📕 Main Types of Retirement Pensions

• Retirement pensions are broadly divided into three types. The main types are as follows:

  • Defined Benefit (DB): Employers decide the retirement benefit level in advance and contribute the necessary funds to pay these benefits. While benefit levels are guaranteed, employers bear the investment risk.
  • Defined Contribution (DC): Employers decide the contribution amount in advance, and benefits are determined by these contributions plus investment returns. Workers make investment decisions directly and bear the investment risk.
  • Individual Retirement Pension (IRP): Individual accounts where workers can separately manage their retirement allowances or retirement pensions. It offers excellent portability, allowing pensions to continue when changing jobs.

• Each type has different characteristics and pros and cons. Key features are as follows:

  • DB plans are stable with guaranteed benefit levels, but workers have limited investment choices.
  • DC plans allow workers to invest directly with potential for higher returns, but workers must bear investment risks.
  • IRP is advantageous for workers who change jobs frequently and can continue operating even after retirement.
  • Currently in Korea, DB plans account for about 70% and DC plans about 30%.

📕 Operation and Management of Retirement Pensions

• Retirement pensions are operated by professional financial institutions. Current operation status is as follows:

  • Banks, insurance companies, securities companies, etc. are registered as retirement pension operators.
  • As of 2024, retirement pension assets have grown to about 350 trillion won.
  • Most funds are invested in deposits and principal-guaranteed products, recording low returns.
  • Investment in risky assets like stocks and funds remains around 10%.

• There are various ways to receive retirement pension benefits. Main receiving methods are as follows:

  • Pension payments: Receiving payments divided over 10 years or more after age 55.
  • Lump sum payments: Receiving the entire amount at once upon retirement.
  • Partial pension and partial lump sum: Receiving part as pension and part as lump sum.
  • Early withdrawals: Withdrawing money early for specific reasons like home purchase, medical expenses, or education costs.
  • Currently, most workers receive lump sum payments, which undermines the original purpose of pensions.

Major Problems with Retirement Pensions

1. Low returns: 10-year average of 2.07%, below even inflation rates
2. Bias toward safe assets: Deposit-focused investment with insufficient long-term asset growth effects
3. High early withdrawal rates: Weakening the original purpose of retirement preparation
4. Preference for lump sum payments: Low pension payment rates limit retirement income security effects
5. System complexity: Poor utilization due to workers' lack of understanding

3️⃣ Current Status and Improvement Plans for Retirement Pensions

✅ Current Status and Problems of Domestic Retirement Pensions

• The retirement pension system has grown significantly in quantity. Key current status is as follows:

  • Since its introduction in 2005, subscribers have exceeded 9 million.
  • Asset size has surpassed 350 trillion won, making it the second largest after the National Pension (1,000 trillion won).
  • Workplaces with 30 or more employees are required to join, while those with fewer than 30 can join voluntarily.
  • More than 60% of all workers are enrolled in retirement pensions.

• However, several problems have emerged in qualitative aspects. Main problems are as follows:

  • Returns are very low, making retirement preparation effects insufficient. The 10-year average return of 2.07% is below the inflation rate of 2.1% during the same period.
  • Early withdrawal rates are high, with annual early withdrawal amounts exceeding 20 trillion won in 2023.
  • Pension payment rates are only around 10%, with most receiving lump sum payments.
  • Workers cannot properly utilize the system due to lack of financial literacy.
  • There are significant differences in product and service quality among operators.

✅ Government Improvement Plans and Overseas Cases

• The government is pursuing improvement plans from multiple angles. Main improvement plans are as follows:

  • Introducing basic products to reduce workers' burden of product selection.
  • Expanding default options (automatic enrollment) so workers are automatically invested in appropriate products even without separate choices.
  • Spreading lifecycle funds that automatically adjust risky asset ratios according to age.
  • Limiting early withdrawal reasons and strengthening procedures to prevent indiscriminate withdrawals.
  • Expanding tax benefits to encourage pension payments.

• It is necessary to refer to successful cases from major overseas countries. Overseas cases are as follows:

  • US 401(k): A DC-type system where workers operate directly, providing various investment options and tax benefits.
  • UK Auto-enrollment Pension: Automatically enrolls all workers, with employers and government providing matching contributions.
  • Australian Superannuation: A mandatory DC-type system managed by professional operators achieving high returns.
  • Chilean Pension System: Operated through individual accounts with government guaranteeing minimum pensions.
  • These countries commonly achieve high returns through long-term investment, professional management, and appropriate risk diversification.

4️⃣ Related Term Explanations

🔎 National Pension

• The National Pension is a public retirement income security system operated by the state.
• The National Pension is a social insurance system directly operated by the state to guarantee citizens' retirement income. All citizens aged 18 to 60 must join mandatorily, and pension amounts are determined by enrollment period and average income.
• Key features of the National Pension include: First, mandatory enrollment where all citizens must join. Second, a partially funded system where current workers' premiums pay current retirees' pensions, but some portion is accumulated for the future. Third, income redistribution function providing relatively more benefits to low-income groups.
• The National Pension forms a three-layer pension system together with retirement pensions and personal pensions, serving as the basic foundation for retirement income. However, due to rapid aging and low birth rates, concerns about financial sustainability are being raised, making individuals' additional retirement preparation increasingly important.

🔎 Personal Pension

• Personal pension is a private pension system that individuals voluntarily join.
• Personal pension is a pension system that individuals voluntarily join to additionally prepare for retirement beyond the National Pension and retirement pension. It includes pension savings insurance, pension savings funds, pension savings trusts, etc., and can receive tax benefits.
• Key features of personal pension include: First, voluntary enrollment where individuals can decide whether to join and contribution amounts according to their choice. Second, full funding method where one's own premiums and investment returns become one's own pension. Third, tax deduction benefits allowing tax deductions up to 7 million won annually.
• Personal pension is the final layer of the three-layer pension system, serving to supplement retirement income insufficient from National Pension and retirement pension. It can be an important retirement preparation tool especially for high-income earners or self-employed people. However, there are disadvantages when withdrawing early, and careful selection is needed as fees and conditions differ by product.

🔎 Defined Contribution (DC)

• Defined contribution is a pension system where contributions are fixed but benefits vary according to investment performance.
• Defined Contribution (DC) is a pension system where employer contributions are predetermined, but final benefits are determined by the investment performance of those contributions. Workers directly choose investment products and take responsibility for investment results.
• Key features of defined contribution include: First, fixed contributions where employer burden is clearly determined. Second, workers have investment choices to select products matching their investment preferences. Third, workers bear investment risk and must accept losses if investments fail. Fourth, individual account method allowing account transfers when changing jobs, providing excellent mobility.
• Financial literacy and investment ability of workers become important factors in defined contribution. For successful operation, it's important to diversify investments from a long-term investment perspective and allocate assets according to life cycles. Many developed countries are transitioning to defined contribution, and Korea is also gradually increasing the proportion of defined contribution.

5️⃣ Frequently Asked Questions (FAQ)

Q: Can I withdraw from my retirement pension early?

A: In principle, retirement pensions cannot be withdrawn until retirement. However, early withdrawal is possible only for specific reasons defined by law. Major withdrawal reasons include home purchase (for first-time home buyers without existing homes), medical expenses (for treatment of self or dependents for 6 months or more), bankruptcy or personal rehabilitation applications, natural disaster damages, and education expenses (higher education costs for self or dependents). However, early withdrawal undermines the original purpose of retirement preparation, so decisions should be made carefully. For early withdrawals, only a certain percentage of contributions can be withdrawn, and future retirement benefits will be reduced accordingly. Also, early withdrawn amounts are subject to other income tax rather than retirement income tax, which may result in higher tax burden. Therefore, unless absolutely unavoidable, it's better to consider other methods first rather than early withdrawal.

Q: Which is more advantageous between DB and DC types?

A: Each DB and DC type has pros and cons, so advantages vary according to individual situations. For DB type, benefit levels are predetermined making it stable, and it's safe for workers since employers bear investment risk. Also, it's advantageous for long-term employees as benefits are determined by final salary and years of service. On the other hand, DC type allows workers to operate directly, potentially earning higher returns based on investment skills, and is advantageous for frequent job changers due to individual account method. Also, it has high transparency with clear contributions. Generally, DB type may be advantageous for those who value stability and plan to work long at one workplace, while DC type may be better for those interested in investment with possibility of job changes. However, recently there are many opinions that DC type could be a better choice if appropriate investment education and support are provided, as DB type returns are low in low interest rate environments. Most importantly, regardless of which system, it's crucial to contribute consistently for long periods, refrain from early withdrawals, and receive benefits as pensions upon retirement.