Reform Plans
Because National Pension reform is Korea’s top national priority, a number of reform proposals have been put forward. Most of them, however, do not dismantle the underlying structural problem — instead they adjust “parameters” such as the contribution rate and the replacement rate, or push back the age at which benefits begin.
But the National Pension was designed at a time when Korea’s fertility rate was approaching 2.0. Now, facing a super-aged society and a fertility rate of 0.6, we cannot deny that the system has a structural flaw.
Here we explain three positions: the reform plan from the Korea Development Institute (KDI), a national research institute; the pension reform announced by the current administration; and NPReform’s own “Soft Transition” — a middle path between the two.
KDI’s New Pension Reform Plan
Fully-Funded, New Pension System
As explained under Current Policy, today’s National Pension system is disconnected from Korea’s present reality. It was designed when the elderly population was small and roughly 600,000–800,000 children were born each year. Today, Korea is a super-aged society with an elderly population above 20% and a fertility rate of 0.6. To address this, KDI proposes moving beyond the current structure entirely: a new, fully-funded pension system with a return ratio of 1.
A fully-funded pension means that, rather than paying benefits to today’s retirees using contributions from tomorrow’s workers, each generation’s contributions fund only that generation’s own benefits. In simple terms: each generation gets back what it put in. Over the long run, this funded model performs best at sustaining the current replacement rate.
Long-Term Sustainability
Comparing three scenarios — the new funded pension (blue), the current system (orange), and doubling today’s contribution rate (yellow) — reform started today would let the new pension meet the current 40% replacement rate with a contribution rate of just 15.5%, the lowest of the three.
Establishing this new pension also means finding a way to shortest possible path to covering the benefits already promised — but not yet funded — under the old system, and doing so as quickly as possible is the best approach.
This new pension would also largely preserve today’s advantage of receiving more than one contributes, because the National Pension both earns steady returns and redistributes the contributions of those who pass away to surviving members. As pension accounts are separated by generation, and as a generation ages, more of its members pass away — leaving survivors receiving more than they contributed. This also achieves a degree of income redistribution.
KDI Reform Plan — Summary
Establishing the new pension: the old system is frozen at a set point in time, and an entirely separate new pension is created.
Government-guaranteed liability: the old system’s unfunded liability (roughly ₩609 trillion as of February 2024, rising by more than ₩50 trillion each year) is backed by general government finances.
Return ratio fixed at 1: through the fully-funded model, a contribution rate of just 15.5% guarantees a long-term 40% replacement rate — a structure where you get back what you put in.
The 2025 Government Reform
The New Pension Amendment
On March 20, 2025, the government passed a new amendment to the National Pension Act through the National Assembly, aimed at strengthening the system’s sustainability and retirement-income guarantees. This was the first pension reform in 18 years — the last had come in 2007 — and it focused on rebuilding stability and public trust in the National Pension.
The amendment stabilizes pension finances by adjusting the contribution rate and the replacement rate, while also expanding credits for childbirth and military service, strengthening support for low-income groups, and formally guaranteeing the state’s obligation to pay pension benefits — all aimed at improving both retirement income and public trust in the system.
A Gradual Reform
As explained under Current Policy, it is true that Korea’s National Pension needs fundamental structural reform. But because sudden structural reform would likely meet fierce public resistance, the ruling and opposition parties agreed in March 2025 on a less radical, parameter-adjustment-focused reform and passed it into law. This is real progress after 18 years — but because it does not change the underlying demographic structure, parameter adjustment alone cannot fully resolve the National Pension’s fundamental sustainability problem.
Key Elements of the Reform
The reform passed in March 2025 rests on two main changes. The larger is a rise in the contribution rate: from the current 9%, it will increase by 0.5 percentage points every year starting in 2026, at the same pace for every generation, reaching 13% by 2033. Earlier in the discussion, a plan to vary the pace of increase by age group — for the sake of intergenerational fairness — was also considered, but the final law applies the same pace to everyone. In addition, the replacement rate rises immediately from 41.5% to 43% starting in 2026.
Alongside this, the National Pension Service has set a goal of raising its annual fund return rate from roughly 4.5% today to above 5.5%. Because investment returns are inherently hard to predict, whether this target is actually achievable remains to be seen.
During discussions, introducing an automatic adjustment mechanism — one that would automatically adjust benefit levels based on fiscal and demographic conditions — was also a central issue. But the ruling and opposition parties could not reach agreement on this point, and it was left out of the final amendment, remaining a task for the future. The fact that this kind of structural, framework-level discussion was deferred shows that this reform remains at the level of parameter adjustment rather than genuine structural reform.
Where Politics and Reality Collide
This reform was a realistic choice — one that could pass with relatively less political momentum than a radical, structural overhaul would have required. Indeed, the ruling and opposition parties reached agreement in March 2025, and the amendment has been in effect since January 2026. But this remains, at its core, a parametric reform that adjusted the contribution rate and replacement rate — it does not answer the deeper structural problem represented by Korea’s low birthrate and aging population. The reform pushed back the fund’s depletion date, but did not prevent depletion itself, and structural discussions like the automatic adjustment mechanism were once again deferred to a future date. In the end, we believe this reform is not the end of the problem, but one stop on the way to a more fundamental structural reform.