Financial Outlook of the NPS(National Pension Service) over 2019-2060
Published on 29 August 2019
Published by Estimates and Tax Coordination Division of the Estimates and Tax Analysis Office
The report on the Financial Outlook of the National Pension Service (NPS) over 2019-2060 highlights the outcome of the NPS financial outlook analysis via NABO’s independent model in combination with various scenarios, with the aim to assist the process of the National Assembly’s discussion on financial reform measures for the pension fund based on the 4th Comprehensive Management Plan for the NPS submitted by the government.
Supposing that the incumbent system is maintained, the financial outlook of the NPS is conducted by estimating the revenues and expenditures of the NPS fund by applying demographic, macro-economic and institutional variables; based on which trends related to fiscal balance and reserves are projected. The revenue estimates consist of revenues from insurance premiums by each type of subscriber and returns from fund management; while expenditure estimates consist of retirement pensions, pensions for families of the deceased and disability pensions which are paid in monthly annuity, as well as lump-sum refunds, lump-sum disability benefits, lump-sum death benefits and other administrative and operational costs, which are paid out in a lump-sum. The variables applied to the financial projection can be classified into demographic variables, macroeconomic variables, institutional variables and returns on fund management variables. For demographic variables, the median household’s birthrate, life expectancy and rate of net international migration – which are included in the Special Estimations of the Future Population (2017-2067) released by Statistics Korea in March 2019 – are applied. Macroeconomic variables are applied based on NABO’s estimated values incorporated with the contents of the Special Estimations of the Future Population and recent economic shifts. In terms of institutional variables, the same institutional variables for the government’s 4th financial calculation are applied. Among all the variables applied, the fund management return ratio has the highest influence on revenues, and is determined as the value of the AA- corporate bond yield (3-year maturity) estimated by NABO, multiplied by a fixed rate.
According to the NPS financial outlook, the NPS Fund reserves will rise from 681.5 trillion won in 2019 to peak at 1,430.9 trillion won in 2039, and enter a fiscal deficit from 2040, bottoming out in 2054. Specifically, it is estimated that the number of subscribers will decline from 22.16 million in 2019 to 12.20 million in 2060, while the number of pensioners will increase from 4.88 million in 2019 to 16.89 million in 2060. The NPS Fund revenues will increase from 68.2 trillion won in 2019 to 148.2 trillion won in 2039, and decrease starting in 2040 to reach 119.7 trillion won in 2060. Expenditures will increase from 25.5 trillion won in 2019 to 425.7 trillion won in 2060.
According to an analysis of the key variables of the NPS financial outlook, in terms of the nominal wage increase rate volatility (±1%p), the time period for reserves to bottom out is expected to shift slightly from the basic year assumed (2054), given its influence on both revenues and expenditures. Considering its influence on revenue only, when the fund management return ratio is increased by 1%p, the time period for reserves to bottom out is expected to be delayed by four years from the basic year assumed (2054), whereas a decrease of 1%p will push forward the time period for reserves to bottom out by three years from the same year. In terms of the insurance contribution rate, every increase of 1%p appeared to result in a 2-4 year delay for reserves to bottom out from the basic year assumed; while a 5%p increase of the income replacement ratio will likely result in the reserves bottoming out 1-2 years earlier.
Regarding the analysis of scenarios for major issues among the four measures of policy mix according to the 4th Comprehensive NPS Management Plan, analysis was conducted on two ways to strengthen later-life income security as well as on the financial shifts in scenarios for expanding revenues to strengthen the fiscal soundness of the NPS. Among the two measures to strengthen later-life income security, the first option is to raise the insurance premium to 12% by 2031 and the income replacement ratio to 45% from 2021, which is expected to delay the time period for reserves to bottom out to 2059, five years later than the basic year assumed (2054). The second option is to raise the insurance premium to 13% by 2036 and the income replacement ratio to 50% from 2021, which is forecast to delay the time period for reserves to be depleted to 2058, four years later than the basic year assumed (2054).
The scenarios for expanding revenues to strengthen the fiscal soundness of the NPS were analyzed in two cases—one in which only the fund management return ratio increases and the other in which a combination of the insurance premium and fund management return ratio increases. In the scenario where only the fund management return ratio increases, the reserves are predicted to be depleted three years later than the basic level assumed (3.7% on average) in 2057 if the return ratio is equal to the specified financial estimate level (4.6% on average). If the return ratio is around the level of the Canada Pension Plan (CPP, 5.9% on average), the reserves are expected to bottom out 11 years later than the basic level assumed in 2065. In the scenario of the combination of the insurance premium and fund management return ratio, if the insurance premium is raised and the fund management return ratio is equal to the CPP’s level, the period required for reserves to be depleted is expected to be delayed by at least 16 years compared to when the current system is maintained. In particular, if the insurance premium is raised by at least 11%, the reserves are not expected to be depleted until 2075.