The logo of the International Monetary Fund (IMF) is seen outside its headquarters building in Washington, D.C., in this photo taken on Sept. 14, 2018. Reuters-Yonhap
The International Monetary Fund (IMF) urged Korea to drastically reform its national pension system, warning of massive debt that is projected to rise 200 percent higher than gross domestic product (GDP) within 50 years.
The message comes as a wake-up call for the Yoon Suk Yeol administration, which has been hesitating to push ahead with pension reforms due to political reasons, although it is aware that the state retirement fund is expected to run dry by 2055.
“Pension reform is needed to safeguard long-term fiscal sustainability and alleviate old-age poverty,” the IMF said in its recent Article IV Consultation report on Korea.
Under Article IV of its Articles of Agreement, the Washington, D.C.-headquartered IMF is mandated to assess the economic, financial and exchange rate policies of member countries.
Based on an IMF team’s visit to Korea between Aug. 24 and Sept. 6, the report listed challenges that Asia’s fourth-largest economy faces in sustaining the pension fund as the demographic crises of plummeting birth rates, longer life spans and an aging population become ever more apparent.
Also well-recognized by the Yoon government, these challenges center on the retirement age, which is associated with the starting age of the pension; contribution rate, which decides the monthly amount of premium paid before retirement; and replacement rate, which decides the monthly pension payout
The IMF pointed to Korea’s retirement age of 62, which is below the OECD average of 64, saying that it will remain below the average even after it is gradually raised to 65 by 2023.
Concerning the country's 9 percent contribution rate, the IMF compared this with the OECD average of 18 percent, assessing it as “low in international comparisons.”
On the other hand, the IMF noted that Korea's replacement rate of 31 percent for a full career average wage earner is low compared to the OECD average of 52 percent. The rate, which is lower than the OECD average, concerns Korea’s elderly, 43.2 percent of whom are in poverty, the highest proportion among all OECD members.
Under the circumstances, Korea's old-age dependency ratio, or the number of people aged 65 and over per 100 people of working age, is projected to reach 80 in Korea by 2050, the highest in the OECD.
The IMF correspondingly warned, “The impact of aging on the public debt-to-GDP ratio is estimated to be large,” adding, “By 2075, public debt-to-GDP would be projected to go up by around 200 percent.”
To stabilize the ratio and the pension fund, the IMF suggested adjusting the retirement age and pension replacement rate collectively.
“None of these policies in isolation seem feasible from a political, economic or social point of view,” it said.
It also suggested that “a combination of smaller adjustments of multiple parameters may be better.”
Other suggestions included recalibrating the roles of the National Pension Service (NPS), which operates the pension fund, and other pension schemes.
Meanwhile, the slowdown in Korea’s economic growth has added to concerns over the pension fund.
The IMF kept its growth outlook for Korea steady at 1.4 percent for this year and 2.2 percent for next year. Inflation is forecast at 3.6 percent this year compared to 3.4 percent in 2022. Additionally, the forecast for next year has been revised upward to 2.4 percent from 2.3 percent.
The organization also forecast that Korea will post economic growth ranging between 2.1 percent and 2.3 percent until 2028.
GDP is expected to expand 2.3 percent in 2025, followed by 2.2 percent increases in both 2026 and 2027. The Washington-based lender expected a 2.1 percent GDP growth in 2028.
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