Long-term Fiscal Outlook for the Four Public Pension Schemes
Published on July 15, 2020
Published by Economic Cost Estimates Division, Estimates & Tax Analysis Department
This report presents the results of fiscal projections of Korea's four largest public pension schemes over the next 70 years (2020 to 2090) if current laws and systems remain unchanged. First, fiscal projections were made of income, expenditures, fiscal balances and reserves of public pensions. Based on those projections, analysis of fiscal evaluation indicators was conducted to assess the fiscal outlook of public pensions. Simultaneously, a separate scenario analysis was carried out to ascertain how the results of these fiscal projections could change in line with variable fluctuations, and an analysis of combined scenarios for each pension scheme to help improve the sustainability of pension finances was conducted. Then the analysis results were compared and analyzed against projections that left current systems unchanged.
First, the results of the long-term fiscal projections of the four public pensions under the assumption that the current system will be maintained, indicate that the total income of the four public pensions is expected to increase 0.9% annually from 55.7 trillion won in 2020 to 104.4 trillion won in 2090 based on constant prices, while total expenditures are expected to increase by an annual average of 2.6% from 55.1 trillion won in 2020 to 330.9 trillion won in 2090 based on constant prices. The fiscal balance is expected to change from a surplus of 0.6 trillion won in 2020 to a deficit of 226.7 trillion won by 2090 due to increases in spending that are more than double expected income. The ratio of GDP to the fiscal deficit is also expected to expand gradually, reaching a high of 6.1% in 2078 before falling to 5.5% in 2090.
Results of the fiscal projections by each pension scheme illustrate that national pension reserves are expected to be depleted by 2055 after reaching their highest level of 1,344.6 trillion won based on current prices (1,072 trillion won based on constant prices) in 2038. The public official pension is expected to increase gradually from 2.1 trillion won in fiscal deficit in 2020 to 32.1 trillion won in 2090. The teachers pension will reach its highest level of reserves at 27.9 trillion won (24 trillion won based on constant prices) in 2032 based on current prices, and is expected to begin falling when the fiscal balance shifts from surplus to deficit in 2033 before it runs dry in 2048. Although the military pension is expected to continue to record a fiscal deficit between 2020 and 2090, as in the public official pension, the increase in income is 0.2%p higher, and the increase in expenditures is 0.1%p lower than the public official pension, a possibly less steep rate of increase in the fiscal deficit than is expected in the government employee pension.
Next, based on the results of these long-term fiscal forecasts of the four public pensions, fiscal evaluation indicators, such as the system dependency ratio, income rate, asset/expenditure ratio, pay-as-you-go cost rate, and benefit/contribution ratio were analyzed. The analysis of the system dependency ratio and the pay-as-you-go cost rate reveals that the burden of pension financing will increase rapidly in future generations, with the teachers pension as high as 229.3 persons for the system dependency ratio and 67.3% for the pay-as-you-go cost rate as of 2090. In addition, in the analysis of the benefit/contribution ratio, although there were differences depending on the characteristics of each pension, the benefit/contribution ratio of more than 2 was generated, giving rise to major fiscal sustainability issues if the current system is maintained due to future demographic changes, etc.
On the other hand, in the scenario analysis, how the fiscal outlook changes depending on variable fluctuations, such as salary inflation rate, fund management income, premium rate, pension replacement rate, and pension eligibility age was individually assessed. Then, based on the results of each individual scenario analysis, another scenario was developed to come up with ways to improve the financial structures of each pension. First, in the scenario analysis of the national pension, five types were suggested and the fiscal projections were implemented by combining the premium rate, pension replacement rate, and pension eligibility age. As a result of the analysis, the depletion point of reserves was estimated to be extended in each by 2~25 years compared to their baseline. In the scenario analysis of the public official pension and the teachers pension, the analysis was made by assuming that the pension rate was lowered and the pension eligibility age was adjusted. Accordingly, in the case of the public official pension, the annual average fiscal balance increased by 2.9 trillion won and 5 trillion won, respectively, based on constant prices, against the baseline. In the teachers pension, the annual average fiscal balance increased by 0.9 trillion won and 1.4 trillion won, respectively, based on constant prices, against the baseline. Simultaneously, in the scenario analysis of the military pension, reduction of the survivor pension payment rate and adjustment of the pension increase rate were commonly applied, and the scenario was established according to the degree of reduction in the premium rate and pension rate. As a result, the analysis indicates that the annual average fiscal balance improved by 0.58 trillion won up to 1.44 trillion won based on constant prices compared to the baseline.
Analysis of the four major public pension schemes overall demonstrates that their sustainability is not guaranteed and the burden of future generations is expected to increase rapidly unless continuous efforts are made to improve them. Therefore, considering the characteristics of each pension and their fiscal outlook, discussing fiscal issues and determining directions for fiscal improvement are crucial. Also, as a means to alleviate the social costs stemming from repeated talks of restructuring the pension system, the introduction and use cases of automatic adjustment mechanisms (AAMs) in European countries such as Sweden and Germany might provide some answers.