In order to encourage more people to join pensions, the Korean versions of Reister Pension and National Employment Savings Trust (NEST) Pension in which the government subsidies are provided to cover part of an insurance premium will be introduced. Lowering the tax on the private pension income of middle and low-income people is also being considered. Furthermore, a policy to oblige all employees to have a retirement pension in the medium and long terms is being discussed inside the government.
According to the authorities on July 17, a comprehensive blueprint for restructuring private pension systems will be announced by September or October of this year.
An authority official said, “The Ministry of Employment and Labor, Financial Services Commission, and Ministry of Health and Welfare, led by the Ministry of Strategy and Finance, will present a strategy to increase private pension holders to guarantee household income after retirement around the regular session of the National Assembly. Benchmarking the Riester Pension of Germany and NEST Pension of England is considered.”
The Riester Pension provides a government subsidy for part of an insurance premium when a low income citizen signs a private pension. This practice has been adapted by Germany since 2002. A NEST Pension provides a 20 percent government subsidy when a small company employee joins a pension, and ultimately encourages more people to hold pensions.
The specific targets, budget, and schedules of the Korean versions of the Riester and NEST Pension have not yet been decided. As the government is on a tight budget, trial services towards a part of the socially disadvantaged class will probably begin first. Depending on the performance, the targets and budget will be expanded accordingly.
For middle and low-income people who can afford insurance premiums by themselves, the government is trying to apply tax benefits instead of actual subsidies. Expanding tax deductions on private and retirement pension payments is being considered. More specifically, the relevant ministries are discussing whether or not to raise the current tax deduction limit of 4 million won to 6-8 million won, or to separate the tax deductions of private pensions and retirement pensions, for example, 3 million won (US$2,905) a year for retirement pensions and 2 million won (US$1,936) for private pensions.
The government is also figuring out a way to unify the pension system based on retirement pensions in the medium and long term. At present, employees could choose either to receive a one-time severance fund or a pension income dispersed over a certain period of time, but this will be unified to only one option for retirement pensions. England, after starting the NEST Pension system, has obliged all employees to have retirement pensions.
The Korean government is attempting to do the same, as employees of medium and small-sized companies tend to be left out in a blind spot for retirement pensions, and therefore face living difficulties in their late age after retirement. Large corporations with more than 500 full-time employees are required to give retirement pensions, but small companies with less than 30 employees are not. One to four out of ten have retirement pension benefits.
Together with mandatory retirement pensions, “fund-type retirement pensions” are also being considered by the relevant ministries. A fund-type retirement pension means that owners and employees manage a trust fund created out of retirement allowances. The above two options are not easy to promote yet, since there are various kinds of interest conflicts among employees, financial institutions, and management. Thus, the government will probably announce a big direction first, and social agreements will be needed for detailed action plans.