As post-retirement years are getting longer, it became a serious issue to secure real purchasing power of retirees responding to the inflation risk. Many countries have dealt with the erosion of purchasing power by granting public pension linking CPI every year. In South Korea, it is instituted by law that the pension payments should be adjusted every year linking CPI for national pension, basic pension, etc. However, currently, CPI is calculated to cover the whole population, so it can be different from the CPI the elderly actual experience and consequently not guaranteeing the real purchasing power of them.
On that account, this article calculated the CPI that domestic elderly consumers' actual experience. The findings are that the Old-age CPI is 1.13 times higher than that for whole population. Especially, the Old-age CPI for low income earners is estimated to be 1.20 times higher.
Moreover, applying the discrepancy to pension replacement rates of national pension, the rates for old men and women are underestimated by 4.8% and 5.5%, respectively in view of real purchasing power. Also, in basic pension, the real purchasing power of low income elderly is underestimated by 7.0% for men and 8.0% for women.
Therefore, when setting the public pension payments, it would be more realistic to use newly produced CPI, which is based on age and income level to secure real purchasing power, by considering the pensioners of national pension are the elderly and those of basic pension are the elderly with low income.
In South Korea, private pensions partly provide some payment designs adjusting the amount of payments in non-qualified personal annuities. Yet, for qualified personal annuities or pension plans, the payment designs are still rigid and need to be varied to meet the various life style and needs of retirees as well as to respond to the price fluctuations in view of real purchasing power.