Basic pension benefits should focus on poor seniors

Yun Suk-myung

The author is an honorary research fellow at the Korea Institute for Health and Social Affairs and chair of Reset Korea Pension Reform Subcommittee.

President Lee Jae Myung’s call for a more progressive basic pension system that provides greater support to vulnerable seniors has renewed momentum for reform. Fiscal authorities are reviewing possible changes, and participants at a June 9 expert forum hosted by the Ministry of Health and Welfare broadly agreed that poorer elderly citizens should receive more assistance.

The debate reflects two realities. Spending on the basic pension is rising rapidly, while Korea’s elderly poverty rate remains the highest among OECD countries. Pressure for reform is therefore growing.

A key problem is the rule requiring the program to cover roughly 70 percent of seniors. As a result, some elderly households that would be considered middle class among all households still receive benefits. Significant reform is needed.

The OECD has recommended a more progressive approach since 2010. Its main criticism is that the current system delivers relatively limited poverty reduction compared with the resources invested. It has also questioned why seniors who are not poor by OECD standards receive the same pension as those living in severe poverty.

Examples frequently cited in public debate illustrate the issue. Under current rules, a dual-income elderly couple earning up to 7.96 million won (about $5,240) per month can still qualify for benefits. Cases like this make it easier to build public support for reform.

The challenge is how to redesign the system.

Many recent proposals suggest replacing the current 70 percent eligibility threshold with a standard based on a fixed share of median income. While this appears reasonable, Korea’s social insurance contributions are roughly half the OECD average. As a result, disposable-income-based median income appears relatively high, creating a risk that too many beneficiaries would be selected.

A better standard would be one more closely linked to elderly poverty.

Given that many older Koreans remain trapped in absolute poverty, the minimum cost of living provides a useful benchmark. Even if eligibility were set at a relatively generous level of 150 percent of the basic living allowance, the monthly income threshold would fall from 2.47 million won ($1,625) to 1.23 million won ($809).

If the program were redesigned to reduce the number of recipients while increasing support for vulnerable seniors, it could both lower fiscal costs and improve poverty reduction. To minimize political resistance, the new eligibility criteria could apply only to people newly entering the system at age 65.

For existing recipients above the relative poverty line, eligibility could be maintained while future benefit increases are frozen, consistent with OECD recommendations.

Considering Korea’s severe elderly poverty problem, policy should focus first on eliminating absolute poverty. This is also in line with OECD recommendations.

Since Korea stopped calculating an official minimum cost of living in 2015, the living allowance under the National Basic Livelihood Security Program has effectively become the closest equivalent. At roughly 820,000 won (about $540) per month, that benefit level is sufficient to lift recipients above absolute poverty.

However, another challenge emerges. The average National Pension benefit for people who contributed for more than 10 years is only about 700,000 won per month. If the basic pension were raised to 820,000 won entirely in cash, many National Pension recipients could feel disadvantaged.

One solution is to combine cash and in-kind benefits. A modest cash payment, similar to the current 350,000 won monthly benefit, could be supplemented through support for housing, caregiving and health insurance costs. Existing in-kind benefits for seniors could also be included in the overall value of support.

If benefits such as free subway rides were converted into monetary value and incorporated into the calculation, total support could reach roughly 820,000 won per month, equivalent to the living allowance. In that case, every senior citizen in Korea could be lifted above absolute poverty.

Challenges would remain. The Lee administration aims to raise the living allowance further by increasing it from 32 percent to 35 percent of median income. Because the allowance is linked to many other welfare programs, any adjustment requires careful consideration.

Despite these limitations, the living allowance remains the most reasonable benchmark currently available for basic pension reform. The goal should not be to expand benefits to as many seniors as possible, but to concentrate support on those who need it most.