South Korea’s National Pension Service is forecast to run out of money in 2055, adding to pressure on the government to implement pension reform in the face of low births and an ageing population in Asia’s fourth-largest economy.
The pension fund will start running a deficit from 2041 before it completely runs out in 2055, according to a budget committee of the pension service on Friday. Experts said the government would have to borrow more money from 2041 to make up the shortfall and continue paying pensions.
“If the current pension structure is maintained, its incomes will outpace payouts for the next 20 years but the trend will reverse from 2041,” Chun Byung-mok, the committee chair, told a press conference on Friday.
“The need for pension reform has become stronger because of the deteriorating fiscal situation.”
The stark outlook for the fund underlines how demographic and lifestyle challenges are straining public finances across a swath of Asian economies.
The government is expected to announce reforms later this year. The NPS administers one of the largest pension funds in the world, with assets under management worth Won915tn ($741bn). It has made a cumulative return of Won480tn since 1988.
People of working age annually contribute 9 per cent of their income to the pension fund and the pension service paid out a total of Won24.2tn in pension past year. The maximum amount of pension people can receive is Won2.5mn a month.
South Korea’s working-age population was 71.7 per cent of the wider population in 2021, but that share is expected to decline to 51.3 per cent by 2050, according to government figures.
The number of South Koreans older than 65 will rise from 8.53mn in 2021 to 17.22mn in 2040, and could account for 43.9 per cent of the population by 2050, according to a report by Statistics Korea, a state body.
In 2018, the East Asian country reported more deaths than births for the first time. Last year, its fertility rate dropped to 0.81 — the lowest in the world — down from 0.84 in 2021. It has declined for the past six years in a row. That compares with an average of four children per woman in the 1970s.
Economists argue that in addition to its demographic challenges, the South Korean labour market is further undermined by the underemployment of the elderly, the young and women.
Despite South Korean women having some of the highest levels of educational attainment in the OECD, the country has a female employment rate of just 57.7 per cent. That compares with 76.6 per cent in the Netherlands, 73.3 per cent in Sweden, 72.2 per cent in Germany and 71.3 per cent in neighbouring Japan.
Earlier this week, Japanese prime minister Fumio Kishida warned that it was “now or never” for Japan to address the effects of its own low birth rate and shrinking population. The country has a fertility rate of 1.3. “Japan is standing on the verge of whether we can continue to function as a society,” Kishida told lawmakers on Monday.
Economists warn that South Korea could follow the same path as Japan. Park Chong-hoon, head of research at Standard Chartered in Seoul, said the South Korean government was not doing enough to address the looming pension crisis due to the public resistance against reform ahead of the parliamentary election next year.
“The answer is out there. Everyone knows that we should increase the amount of contribution and reduce the benefits,” he said. “But it is a politically sensitive issue. Although the time bomb is slowly ticking, the depletion is still far away while the election is around the corner. It will be difficult for the government to reform the structure immediately.”
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