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A Structural Change in Korean National Pension for Efficient Multi-pillar Retirement Income Security System

  • Journal of Insurance and Finance
  • 2012, 23(4), pp.61-98
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Wonshik Kim 1

1건국대학교

Accredited

ABSTRACT

This paper suggests a structural reform of the Korean national pension system. Korean retirement income security system consists of national pension, legal corporate pension, and individual pension, which are self-financed, and basic aged pension and minimum life guarantee benefit of the aged, which are tax-financed. Even though these programs are substitutable for one another, they are individually-run, creating moral hazard problems in households' contribution to national pension. Therefore, there is a need for the establishment of an efficient system that provides optimal level of retirement income to households. I suggest a hybrid national pension system, where (i) national pension uses a defined benefit method in financing basic benefit, and a defined contribution method in income related benefit; (ii) basic benefit is income-tested while insuring basic aged pension and minimum life guarantee benefit of the aged, and; (iii) income related benefit are allowed to be contracted out from legal corporate pension. The policy change decreases the government's fiscal burden in case of depletion of national pension fund, and strengthens the capital market by making pension fund market more competitive.

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