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Effects of the Reform of Post-retirement Income Protection System

Yongha Kim 1

1순천향대학교

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ABSTRACT

This paper is aimed at looking into reform steps OECD and EU countries have taken in response to the need for raising the coverage, equity, and financial stability of their post-retirement income protection systems, and providing policy suggestions for the improvement of Korea’s pension schemes. Making reference to a large body of previous literature and reports, this paper takes up an analysis of policy changes since the 1990s in post-retirement income protection systems in a number of OECD and EU countries. The effect of individual policy changes of note made to pension systems of these countries are analyzed using cross-sectional data sets in linear regression models. Many countries around the world have made changes to their post-retirement income protection systems, and since the 1990s, in particular, such changes have been, if gradual, strong in their impact in the long-term. Pension reforms under review are both paradigmatic and parametric. For most countries in reform of their pension systems chose a combination of both paradigmatic parametric changes. It is important, however, to notice that the effect of parametric changes is not necessarily insignificant and the effect of paradigmatic changes is not always significant. When pension reforms take place, they take place with a view to raising equity and financial stability, but not unaccompanied by additional measures to address the problem of coverage. The participation rate and replacement level of a pension scheme are found to have significant effect on coverage. As to the financing of pension, many countries have taken reforms steps away from the previous pay-as-you-go basis to strengthening the funded component over time. Parametric reforms are an important policy instrument to increase financial stability. Many of the countries under examination are found to have taken parametric reform steps in the form of a combination of a direct downward adjustment of income replacement level, changes in benefit formula and the pensionable age, and shift to price-indexation. The effect of the upward adjustment of the pensionable age as a response to ever-increasing life expectancy is considered significant. A variety of policy measures will have to be taken to increase the financial stability of Korea’s post-retirement income protection system, and to this additional measures must be taken to reduce the adverse impact of demographic aging.

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