Fiscal Demand Estimation of Basic Pensions from 2018 to 2027
Published on 26 November 2018
Published by Social Cost Estimates Division of the Estimates & Tax Analysis Department
The basic pension rate of a basic pension started at 200,000 won in 2014, increased every year according to the inflation rate, and was adjusted to 250,000 won in September 2018, which was the largest adjustment made since the basic pension system was first introduced in 2014. In addition, according to the Income Support Measures for the Low-Income Group which was announced by the government in July 2018, the basic pension rate for senior citizens in the low-income group was increased from 250,000 to 300,000 won, provided that the period of increase would be set in 2019 for senior citizens in the bottom 20% income group, in 2020 for senior citizens in the bottom 20 to 40% income group and in 2021 for senior citizens in the bottom 40 to 70% income group. Based on this arrangement, the government has incorporated in the 2019 budget plan its intention to increase the basic pension rate to 300,000 won for senior citizens in the bottom 20% income group.
The decision regarding the scope of the basic pension rate increase should be more prudently and meticulously reviewed with future fiscal demands taken into account. Against this backdrop, this report provides the fiscal demand estimation results over the next 10 years from 2018 to 2027 which were drawn up through different scenarios resulting from a range of combinations of the eligible beneficiaries and timing of the basic pension rate increase, thereby enhancing the understanding of the fiscal demands related to a variety of policy issues. Taking a look at the fiscal demand estimation results of each scenario, when the basic pension rate is raised to 300,000 won in 2019 for citizens 65 years old and older in the bottom 20% income group (Scenario 1), the annual fiscal demand over the next 10 years is estimated at 19.3 trillion won on average (additional annual fiscal demand estimated to be 700 billion on average). When increasing the basic pension rate to 300,000 in 2019, 2020 and 2021 for senior citizens in the bottom 20%, 20-40% and 40-70% income groups, respectively (Scenario 4, government proposal), the annual fiscal demand over the next 10 years is estimated at 20.8 trillion won (additional annual fiscal demand to be 220 million won).
Meanwhile, according to the current basic pension system, if the payment rate of a National Pension beneficiary is at or above a certain level, the basic pension rate is deducted from the payment amount. In this respect, issues are raised since the current linkage system between the basic pension and National Pension is complicated and undermines the incentive to join the National Pension scheme. In order to provide fiscal information regarding this debate, this report has included an estimation of the fiscal demand that may occur when the basic pension rate is set without being linked to the National Pension scheme. As a result, the additional annual fiscal demand when the basic pension rate is not linked with the National Pension scheme is estimated at 596.9 billion won on average over the 10-year period between 2018 and 2027.
Finally, this report has incorporated into the base line the additional fiscal demand that may occur by adjusting the deduction method from the current “stairway-method” to a “sliding-method” in order to prevent an income-reverse effect. As a result, annual expenditures are expected to decrease by 15.6 billion won on average over the next 10 years.