A group of old men play "janggi," or Korean chess, at Tapgol Park in central Seoul, Feb. 20. Newsis

Most people understand that investing is about balancing risks and returns. Many also recognize that being overly cautious — to the point where returns fail to keep up with inflation — is not a sound investment strategy.

However, in Korea, retirement pensions face this very issue. According to the Korea Retirement Pension Institute, the average annual return on retirement pensions over the past 10 years has been 2.07 percent, while the inflation rate stood at 2.2 percent.

The retirement pension system was first introduced in 2005 to ensure the public has a stable and secure life as they grow older. While the national pension covers basic living expenses, the retirement pension is intended to provide additional financial stability after retirement.

In this super-aging country, strengthening this security framework is crucial — especially considering that the national pension is depleting at a rapid pace.

Many Koreans have yet to fully grasp the importance of growing their retirement savings.

A 60-year-old man who spent decades in a blue-collar job shared his concerns, saying, "My pension might be my only source of income when I grow older. I couldn't risk investing it and losing everything."

Younger Koreans often see retirement as a distant concern. Lee, a 29-year-old office worker, received a retirement allowance from her previous company after switching jobs but withdrew the entire amount at once. "I thought it would be better to invest in other riskier assets for higher returns."

Retirement payouts here are widely perceived as safe assets and are predominantly managed in deposit-like products. This preference is reflected in the choices of 87 percent of retirement pension holders, who opt for "ultra-low-risk investments."

While the government introduced a default option system in 2023 to boost returns, its impact has been limited, as many participants continue to favor low-risk options that can protect their principal, similar to bank deposits. The default option allows fund managers to automatically invest funds when account holders do not make an active selection.

Even when individuals try to choose financial products, a structural limitation remains, as the system does not actively support or encourage individuals to take a more proactive approach toward investing.

For instance, investing in exchange-traded funds (ETFs) listed in overseas markets — currently a favorite among Korean investors — is not allowed under the retirement pension system.

An older man fills out a job application at an older adult job fair in Suwon, Gyeonggi Province, in this October 2023 photo. Newsis

"Effective diversification means spreading investments across a variety of asset classes, including risky assets, safe assets and emerging asset categories," said Kim Byung-duck, a senior research fellow at the Korea Institute of Finance. "However, regulations, such as the 70 percent cap on risk asset investment, still restrict portfolio flexibility. The limited list of eligible investment assets prevents a truly diversified approach."

Due to these constraints, most retirees and job changers opt to receive their retirement savings as a lump-sum payout rather than using them as a pension. In 2023, 89.6 percent of the 530,000 individual retirement pension accounts were closed, with funds withdrawn.

"Korea is facing a severe crisis of low birthrates and rapid aging before the national pension system has fully matured. Retirement pensions are failing to function effectively as a reliable source of retirement income," stated a 2022 report from the National Pension Research Institute.

However, there is a positive shift. Interest in active investment is rising, as evidenced by the significant outflow of retirement pension funds from banks to securities firms. Since investing in ETFs is only available through securities firms, this trend is expected to continue.

Market watchers predict that the retirement pension market will keep expanding as the population ages. Between 2011 and 2023, retirement pension assets increased 7.7 times from 49.9 trillion won ($34.6 billion) to 382.4 trillion won. If this growth trend continues, they are expected to surpass 500 trillion won by the end of 2026.

"Not all participants have investment expertise, and even those who do may struggle to achieve proper diversification due to asset size limitations," Hong Won-ku, a research fellow at Korea Capital Market Institute, said.

"To boost returns, it is essential to explore various strategies, including allowing retirement pension providers to manage assets based on their independent judgment. This shift would help overcome the limitations of individually driven investments," he said.