Parametric Pension Reform Options in Korea

IMF Working Papers, October 11, 2024

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Population aging in Korea will pose substantial challenges to the financial sustainability of its public pension system.
Under current policies and plausible assumptions, public pension spending can increase by as much as 4 percent of GDP during 2020-70, while contribution revenue will largely stay constant.
The expected rise in public pension spending mainly reflects:
- the increase in the old-age dependency ratio (and therefore the number of pension recipients),
- the deceleration in GDP growth in response to demographic changes, and
- to a lesser extent, the maturing of the National Pension Scheme.
Three pension policies are considered to stabilize the public debt-to-GDP ratio: a retirement age increase, higher social security contributions, and a lower pension replacement rate, and a combination of all three.
The adjustments need to be large to stabilize the debt-to-GDP ratio if each policy lever is used in isolation.
A combination of smaller adjustments of multiple parameters yields better results.

Increase in the old-age dependency ratio leading to a larger number of pension recipients.
Deceleration in GDP growth in response to demographic changes.
Maturing of the National Pension Scheme (lesser contribution to spending rise).

Large adjustments are required if policy levers are used in isolation to stabilize the debt-to-GDP ratio.
A mix of smaller adjustments across multiple parameters performs better in stabilizing public debt-to-GDP outcomes.

Source: "Parametric Pension Reform Options in Korea", IMF Working Papers 2024/223.