Korean Government to Transform Retirement Pension System into Public Fund

The Ministry of Employment and Labor in South Korea is set to reform the retirement pension system, which currently holds approximately 430 trillion won, to resemble the National Pension Service (국민연금) as a public pension scheme. This initiative will be implemented in five phases, making it mandatory for all workplaces. Once the process is complete, retirement benefits will only be available as pensions rather than lump-sum payments. Additionally, the government plans to amend the law to allow employees to receive retirement benefits after just three months of work, instead of the current requirement of one year.

According to reports from June 23, the Ministry has presented these proposed changes to the National Planning Committee. As of the end of last year, the retirement pension fund surpassed 431 trillion won and is projected to exceed the size of the National Pension by 2050. The government believes that this reform will enhance retirement security for all workers.

To facilitate this transition, a new Retirement Pension Corporation will be established, and tax incentives will be introduced to prevent early withdrawals. However, the government is cautious about the financial impact on small and medium-sized enterprises (SMEs) and is considering a phased implementation based on company size, starting with large corporations that employ over 300 people.

The retirement benefits system currently includes both lump-sum payments and pension-style payments. By mandating the pension system, the government aims to eliminate the lump-sum payment option, thereby reducing income disparity in retirement and addressing issues related to elderly poverty.

Lump-sum payments can be at risk if a company faces financial difficulties, whereas pension funds must be held in external financial institutions, reducing the likelihood of non-payment. The Ministry emphasized the stability of the pension system in its report.

Despite the planned mandatory implementation, the government recognizes that the transition could be disruptive and will apply the changes gradually based on company size. For instance, the rollout will begin with companies employing over 300 individuals, followed by those with 100-299, 30-99, 5-29, and finally, those with fewer than 5 employees. Currently, 91.7% of companies with over 300 employees have adopted retirement pensions, while only 41.4% of companies with 5-29 employees and 10.4% of those with fewer than 5 employees have done so. To encourage early adoption among smaller firms, the government plans to subsidize 10% of their contributions for three years.

The Ministry is also aware that if many individuals withdraw their pensions before reaching retirement age, the purpose of the reform could be undermined. Currently, there are legal reasons for early withdrawals, such as housing funds. To counter this, the Ministry has proposed tax incentives for those who remain enrolled for over 20 years before receiving their pensions, as well as additional tax benefits for younger workers.

Changes to fund management are also on the horizon, with the Ministry considering allowing investments in venture companies, which were previously prohibited. Unlike the National Pension, retirement pensions are tied to wages, limiting investment options. Allowing investments in domestic unlisted stocks and venture firms is expected to enhance returns and support the growth of startups. According to the Ministry of SMEs and Startups, last year, domestic venture investments reached 11.9 trillion won, and enabling retirement pension investments could significantly expand this market.

The Ministry has reported plans to allow employees to receive retirement benefits after just three months of work, emphasizing the need for stronger social safety nets and protection for vulnerable labor market groups. Starting next year, the Ministry will conduct cost-benefit analyses and social dialogues, aiming for legislative action by 2028.

If the government proceeds with this plan, it would mean that nearly all workers, including short-term employees, would be entitled to retirement benefits after just three months of work. This could significantly increase the financial burden on companies and raise concerns about a trend where employees might leave jobs after receiving their retirement benefits. Critics argue that this change could undermine the system designed to reward long-term service. A representative from a company expressed concerns about the financial strain on small businesses, which are already grappling with rising minimum wages and the added burden of retirement benefits. The Ministry acknowledged these concerns, stating that the legal implications of retirement benefits and the economic burden on small businesses will be key issues requiring social consensus.