Pension, tax increase to stir debate over Korea’s social welfare

Korean politicians, economists and government officials are expected to engage in debates on whether to further increase workers’ monetary contribution to the country’s national pension, and increase taxes for sustainability.

This comes as the Organization for Economic Cooperation and Development recommended Asia’s fourth-largest economy to increase taxes and the social safety net pension system on expectations of growing social spending due to the aging population.

However, observers say issues concerning an increase in consumption taxes will likely be put off and lightly be dealt with until after the presidential campaign at the end of next year, given that taxes are a politically sensitive subject.

“Issues such as a tax increase or tax exemption reductions will not likely be brought up for public debate in the short term, perhaps not until after the presidential election. The national pension scheme is more of an urgent issue,” said an insurance industry source.

With Korea facing slow growth and growing poverty among the elderly, the OECD recommended in a report that the country maintain its replacement rate, or the portion of laborers’ income that will be given back to them as pension after retirement, at 46 percent.

Instead of cutting the rate to around 40 percent as being carried out by the Ministry of Health and Welfare, Korea should extend the period of its workers’ income contribution to the national pension program, in addition to keeping the replacement rate steady or increasing it close to the OECD average.

“Countries with low safety net pensions tend to have high poverty rates,” the OECD report said.

“Even with the cut in the replacement rate and the planned hike in the pension eligibility age from 61 to 65 in 2033, pension spending will rise steadily. ... With an average of 20.6 years of contributions through 2040, the replacement rate would be below 20 percent, which would be too low to reduce elderly poverty.”

Korea’s current contribution rate of 9 percent is well below the OECD average of 19.6 percent, and its replacement rate of 46 percent is below OECD’s rate at over 50 percent.

As Korea faces rising social welfare spending, the OECD also suggested raising taxes as its tax revenue is still below that of the OECD average.

The National Pension Service, the state-run pension manager, suggested in a report that it would be helpful should Korea raise the contribution rate to around 13 percent, from 9 percent.

The Welfare Ministry said in a statement that the reduction of its replacement rate to around 40 percent has gained social consensus, and that this measure would further delay the likelihood of the national pension running out of money from 2047 to 2060.

By Park Hyong-ki (hkp@heraldcorp.com)