A proposal has been made by a national policy research institute to reduce the basic pension provided to seniors with an income recognition amount in the lowest 70% to 50% of the median income (the median value of household income in the country). As the income and asset levels of seniors increase, the number of seniors who are not in vulnerable groups among pension beneficiaries is rising, and it is expected that financial expenditures for the basic pension will significantly increase due to rapid aging.
Researchers Kim Do-hyeon and Lee Seung-hee from the Korea Development Institute (KDI) announced on the 25th a report on the 'direction for reforming the basic pension (basic old-age pension system) selection method.' The research team suggested that the criteria for selecting basic pension beneficiaries should be changed from 'the lowest 70% of seniors (excluding the top 30%)' to '50% of the median income.' They argued that the financial savings achieved through the revision of selection criteria should be used to provide robust support for economically vulnerable seniors.
◇ Basic pension eligibility criteria similar to median income… Does not reflect trends in senior poverty rate
The basic pension system was introduced in 2008 to alleviate poverty among seniors, providing support to the lowest 70% of income and assets for those aged 65 and older. This year's standard amount for determining eligibility for the basic pension for couples is 3.64 million won, which is 93% of the median income (3.68 million won). In 2015, it was half the level of the median income (56%), indicating a rapid increase.
KDI noted, 'Among the elderly, recent generations have benefitted more from the National Pension, resulting in higher income and asset levels and improved poverty rates,' adding that 'the current method does not reflect trends in the senior poverty rate and still provides support to 70% of seniors.' According to data compiled by the National Pension Service, the benefit rate for those born in the late 1950s was 61% as of September last year, with a benefit amount of 600,000 won, more than double that of those born in the 1930s (26.3% and 260,000 won).
According to KDI, the number of seniors and basic pension beneficiaries is expected to increase significantly due to rapid aging. The number of basic pension beneficiaries rose from 2 million in 2015 to 9.93 million last year, and is projected to reach 19 million by 2050. As a result, the burden per working-age population is expected to surge from 740,000 won in 2025 to 1.88 million won in 2050 and 2.49 million won in 2070.
◇ If maintained as is, cumulative financial expenditure for the basic pension will reach 1,905 trillion won by 2070… 'Linked to median income would reduce it by 23%'
In this regard, KDI compared three scenarios for selecting basic pension beneficiaries: ▲ the existing plan ▲ fixing the selection criteria to those within 100% of the median income of the entire population of the country ▲ starting the selection criteria from 100% of the median income and reducing it annually by a certain percentage so that by 2070 it would be defined as below 50% of the median income. The implementation timing for the two plans is when the income of the lowest 70% of seniors exceeds the median income, which would be 2029 for couples and 2032 for single households.
KDI projected that if the current basic pension system is maintained, cumulative financial expenditure could reach 1,905 trillion won by 2070. The annual pension expenditure is expected to increase from 27 trillion won (1.09% of GDP) in 2025 to 46 trillion won (1.48% of GDP) in 2050, before reaching 43 trillion won (1.33% of GDP) in 2070.
In contrast, if the selection criteria for the basic pension are fixed at 100% of the median income, the percentage of beneficiaries is expected to decrease to 57% by 2070, with financial expenditure projected to decrease by 19% compared to the current level, totaling 35 trillion won (1.33% of GDP). This would result in an average annual saving of 4.25 trillion won, leading to a cumulative deficit of 1,710 trillion won by 2070, which is a 10% reduction compared to the current situation, according to KDI.
The effect is even greater if the basic pension selection criteria are gradually reduced from 100% to 50% of the median income. By 2070, the percentage of beneficiaries is projected to drop to 37%, with financial expenditure expected to decline to 23 trillion won (0.71% of GDP), representing a reduction of approximately 47% compared to the current situation. On an average annual basis, this would result in a saving of 9.56 trillion won, leading to a cumulative deficit of 1,465 trillion won by 2070, which reflects a projected reduction of 23% compared to the current level.
This reform proposal is also expected to reduce the burden per working-age population, thereby alleviating the burden on future generations. According to KDI, if the 100% median income proposal is applied, the burden per working-age population is expected to be approximately 300,000 won less than the current level (2.49 million won), reaching 2.02 million won. If the criteria are reduced from 100% to 50% of the median income, the burden per person is expected to decrease to half the current level (1.33 million won).
◇ 'Reform of income recognition amount should increase pensions for vulnerable groups'
KDI argues that the financial resources obtained through system improvements should be used to increase the standard pension amount. According to KDI, the Ministry of Health and Welfare plans to raise the current basic pension of 343,000 won to 400,000 won by 2027. KDI believes that if 400,000 won is paid to seniors with an income recognition amount in the lowest 70%, an additional cumulative financial expenditure of 288 trillion won will occur by 2070.
On the other hand, if the criteria for selecting basic pension beneficiaries are set at 100% of the median income, it is conceivable to raise the benefit amount to 377,000 won in 2026 without additional financial expenditure. If the criteria are gradually reduced from 100% to 50% of the median income, it is expected that the amount could be increased to approximately 447,000 won, which is an increase of about 100,000 won, without incurring extra financial expenditure. KDI analyzed that 'linking the selection criteria to the median income can respond more effectively to poverty alleviation for low-income seniors.'
KDI asserted, 'It is necessary to narrow down the basic pension beneficiaries to relatively impoverished seniors by reducing the median income from 100% to 50%,' while also pointing out that 'there is a downside that the number of basic pension beneficiaries declines rapidly.' They emphasized the importance of creating an environment where seniors capable of working can do so and encouraging them to rely on earned income to secure stable income in old age through a combination of earned income, the National Pension, and private pensions.
KDI added that 'a plan to integrate the basic pension and the basic livelihood guarantee system for seniors should be considered.' There are concerns that as the number of beneficiaries decreases and benefit amounts increase, the overlapping of the public structural roles of the basic livelihood guarantee system and the basic pension system may increase the complexity of the policy.