The Intra and Inter-generational Welfare Impact of the Financing Policies of the National Pension System (in Korean)

As the dependency ratio is rapidly increasing, the sustainability of the Korean National Pension System is questioned. In this paper we developed an overlapping generations model, á la Auerbach and Kotlikoff (A-K, 1987) to analyse the effects of the ageing on the macro-economy and the Korean National Pension System. We improved the original A-K model, utilizing the subsequent developments in the modeling, such as Fullerton and Rogers(1993), Altig et al(2001) and some more. We applied the model to the six alternative policy scenarios, four parametric reforms gradually increasing premium rate to 12% and/or subsidizing its deficit by tax revenues. The other two structural reforms are to change the Basic Pension Amount (BPA) formula either with only A value (average income of all insured) or with only B value (life-time average income of the particular insured person) which results in two extreme changes in the degree of tax-benefit linkage of pension system. A policy recommendation through the simulation is to gradually increase the premium rate to 12% and subsidizing by tax revenue after exhaustion of the pension reserve fund, which enhances the welfare of future generations with minimum backlash from people outside of Nation Pension System. The simulation result for the two structural reforms makes it clear that reform proposals that alter the degree of tax-benefit linkage have very sensitive impacts by income class.