Pension Reform Passed, Insurance Premium Rate Increased by 13% and Income Replacement Rate Raised to 43%
On March 20, 2025, the ruling and opposition parties reached an agreement on the national pension reform plan. This is a large-scale overhaul that has not occurred in 18 years since 2007, considered the third most significant reform since the introduction of the National Pension System in 1988.
In particular, amid growing concerns about pension finance due to an aging population and declining birth rates, this agreement is viewed as an important turning point to ensure citizens' stable old age and enhance the country's credibility.
Insurance Premium Rate Increased by 13%, Income Replacement Rate Raised to 43%
The most significant change is the plan to gradually raise the insurance premium rate from the current 9% to 13% by 2033. The rate will increase by 0.5 percentage points each year, marking the first adjustment to premiums since 1998. While this change may increase the burden on contributors, it is considered an essential measure to ensure the soundness and sustainability of the national pension finance.
The income replacement rate will be raised from the previous 40% to 43%. This indicator represents the percentage of a pensioner’s lifelong income that their pension represents, and it is expected to contribute to improving the pension levels for future beneficiaries.
For example, a contributor with a monthly income of 3.9 million won who pays premiums for 40 years is expected to receive a pension amount in the first year that increases by approximately 90,000 won from the previous 1.237 million won to about 1.329 million won. Such changes are expected to have a positive impact on pension beneficiaries.
Expansion of Military Service and Childbirth Credits, Support for Low-Income Contributors
The reform plan announced this time strengthens the 'social contribution compensation system' for those whose insurance premium payment periods have been shortened due to military service or childbirth. In particular, military service credits will be increased from the current 6 months to a maximum of 12 months, and childbirth credits will be improved to apply from the first child instead of the second. Additionally, the upper limit of 50 months for the recognition period due to childbirth will be removed, allowing for actual compensation to take place.
Furthermore, a new insurance premium support system for low-income local subscribers will be introduced. Low-income local subscribers not affiliated with any workplace will be able to receive up to 50% of their premiums covered by the government for a maximum of 12 months, regardless of income. This aims to increase the incentives for enrollment and reduce gaps in insurance coverage.
Legal Clarification of National Payment Guarantee... Enhancing System Credibility
The state's payment obligations related to the national pension will be concretized into law. Although the existing law included provisions for payment stability, the amendment adds a clear clause stating, “The state guarantees the stable and continuous payment of pension benefits.”
This change is expected to alleviate the public's anxiety and enhance trust in the system. However, there are concerns that the state's guarantee of payments may lead to an increase in 'effective national debt', which could lower the 'national credit rating'.
Deferment of Fund Depletion by up to 15 Years... Introduction of Automatic Adjustment Mechanism to be Discussed Later
According to financial analysis, it is expected that the national pension fund will enter deficit around 7 years from now, and the point at which the fund is depleted could be delayed by up to 15 years.
If accompanying supplementary policies such as adjusting the investment return rate are implemented, the sustainability of the fund is expected to be further enhanced.
While key reform items such as the insurance premium rate and income replacement rate were addressed in this agreement, structural reform will continue to be discussed through the pension reform special committee. A major topic currently being addressed in structural reform is the automatic adjustment mechanism, such as Japan's macroeconomic slide model, which was not included in this agreement due to significant differences of opinion between the ruling and opposition parties.
The government and ruling party emphasize that such measures are necessary to ensure financial stability, while some opposition parties and civic groups express concerns over 'automatic reductions'. Therefore, it is essential to pay attention to how future discussions will progress.
First Step Towards a Sustainable Pension System
This national pension reform signifies more than just adjusting numbers.
The goal is to restore trust in the system and ensure financial stability through various aspects, including increasing the insurance premium rate, changing the income replacement rate, expanding compensation for military service and childbirth, strengthening support for low-income groups, and legally guaranteeing national payments.
If these discussions lead to future structural reforms, this reform is expected to mark a significant turning point in enhancing the sustainability of the national pension system and significantly improving the level of old-age protection for the public.
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