IMF Working Papers

Parametric Pension Reform Options in Korea

By Daniel Baksa, Boele Bonthuis, Si Guo, Zsuzsa Munkacsi

October 11, 2024

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Format: Chicago

Daniel Baksa, Boele Bonthuis, Si Guo, and Zsuzsa Munkacsi. "Parametric Pension Reform Options in Korea", IMF Working Papers 2024, 223 (2024), accessed November 21, 2024, https://doi.org/10.5089/9798400290817.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Population aging in Korea will pose substantial challenges to the financial sustainability of its public pension system. Under current policies and plausible assumptions, public pension spending can increase by as much as 4 percent of GDP during 2020-70, while contribution revenue will largely stay constant. This expected rise in public pension spending mainly reflects the increase in the old-age dependency ratio (and therefore the number of pension recipients), the deceleration in GDP growth in response to demographic changes, and, to a lesser extent, the maturing of the National Pension Scheme. Three pension policies are considered to stabilize the public debt- to-GDP ratio: a retirement age increase, higher social security contributions, and a lower pension replacement rate, and a combination of all three. The adjustments need to be large to stabilize the debt-to-GDP ratio if each policy lever is used in isolation. A combination of smaller adjustments of multiple parameters yields better results.

Keywords: Aging, Overlapping generations model, Pensions

Publication Details