Health and Welfare Minister Cho Kyoo-hong speaks during a press conference on pension reforms at Government Complex Seoul, Wednesday. Yonhap

The government is seeking to gradually increase the pension premium rate from the current 9 percent of income to 13 percent and the pension's income replacement rate from 40 percent to 42 percent through a major reform designed to restore public trust in the fund's sustainability, particularly among young people.

The reform plan, announced on Wednesday by the Ministry of Health and Welfare, includes measures to enhance fairness among different age groups by increasing pension premiums more gradually for younger contributors compared to older ones.

Pension reform has been delayed for many years as previous administrations hesitated to address the unpopular issue, which involves higher premium rates for smaller benefits in the long term amid the nation's demographic crisis.

The plan is subject to approval by the opposition-controlled National Assembly. If passed, it would mark the first increase in the pension contribution rate in 27 years.

The nation's pension fund, one of the world's largest with 1,147 trillion won ($855 billion) in assets, is projected to be depleted by 2055. Payments are expected to exceed contributions starting in 2041 due to the declining number of newborns, who are future contributors.

Under the plan, the ministry aims to increase the pension premium rate to 13 percent, with adjustments varying by age group. For instance, the rate for a subscriber in his 50s would rise by 1 percentage point annually starting in 2025. In contrast, those in their 20s would see an increase of 0.25 percentage point annually, while subscribers in their 30s would experience a 0.33 percentage point increase, and those in their 40s would see a 0.5 percentage point increase.

The ministry explained that this approach is necessary for young contributors because a uniform increase in premium rates would impose a heavier financial burden on those who will be paying premiums for more years before receiving pension benefits.

"The reform focuses on bolstering the sustainability of the pension so that all generations can share the benefits of the system," Health and Welfare Minister Cho Kyoo-hong said in a statement.

Graphic by Cho Sang-won

The government also aims to increase the pension's income replacement rate ― the percentage of a worker's pre-retirement income that is paid out by the pension ― to 42 percent from the current 40 percent. This is lower than the proposals previously suggested ― 43 percent by the ruling People Power Party and 45 percent by the main opposition Democratic Party of Korea.

In another notable change, the ministry said it would review the adoption of an automatic adjustment mechanism, a system designed to modify benefit levels based on factors such as demographic and economic conditions.

Such systems have been adopted by 24 out of 38 members of the Organization for Economic Cooperation and Development (OECD) for the stability of their pension funds, according to the ministry.

As part of its efforts to boost public confidence in its pension system, the ministry also plans to codify the government's commitment to providing pension payments into law. Currently, the law only states that the government is responsible for "implementing necessary policies" to ensure the fund's stability and sustainability.

Improving the investment returns of the fund is also part of the reform plan. As of 2023, the pension's average annual investment return was 5.92 percent, with the amount of the fund under management standing at 1,036 trillion won.

The government hopes to increase the long-term investment return from its current rate of around 4.5 percent to 5.5 percent through improved allocation strategies.

To many, the reform plan may sound inadequate to address the country's high poverty rate among elderly people, which is more than 38 percent, according to government data.

The ministry said it aims to lower the rate with another key pillar of its welfare system: basic pension, which is given to 70 percent of all citizens aged 65 years or older based on income levels.

It announced plans to increase the basic pension for all beneficiaries to 400,000 won per month by the end of 2027, up from the current 330,000 won.