Income Redistributive Effects of South Korea's 5th National Pension Reform Plan: Focusing on Disparities in Contribution Period and Life Expectancy across Income Class

This paper aims to evaluate the income redistributive effects of various reform proposals under South Korea's 5th National Pension Comprehensive Plan (Draft), announced by the Ministry of Health and Welfare on October 30, 2023. By conducting a simulation analysis, the study examines the reform proposals from the perspective of the income redistribution function that has been embedded in the design of the National Pension System since its inception. Using panel data from the Korean Labor & Income Panel Study (KLIPS) spanning from 1998 to 2021, we estimate the lifetime income of individual enrollees and calculate their total pension contributions. Simultaneously, we determine the pension benefit period based on the gender and cohort-specific life expectancies derived from the future life tables provided by Statistics Korea. Subsequently, we estimate the total pension benefits. The Mean Log Deviation (MLD) is calculated as a measure of income inequality to assess how each reform proposal (from Reform Proposal 1 to 6) affects income redistribution compared to the current system. Additionally, we perform a separate analysis that incorporates the disparities in contribution period and life expectancy among different income classes, reflecting the real-world inequalities in these aspects. When evaluating the income redistributive effects of each reform proposal by employment type (regular employees, non-regular employees, and the self-employed), assuming a 20-year contribution period for all enrollees, all reform proposals?including those involving increased contribution rates (Proposals 1, 2, and 3), adjustments to the rate increase speed (Proposal 4), and raised the pensionable age (Proposals 5 and 6)?demonstrated improved income redistribution. However, when reflecting the income disparities by income bracket in contribution period and life expectancy, proposals to raise the pensionable age resulted in deteriorated income redistribution across all employment types. This outcome is attributed to the exacerbation of intragenerational income redistributive effects. Based on these analysis results, it is confirmed that while the Korean government's proposed National Pension reforms?aiming to maintain long-term fiscal balance by increasing contribution rates, adjusting the speed of rate increases by generation, and raising the pensionable age?differ in their income redistributive effects under the same fiscal goal. Particularly, raising the pensionable age could potentially worsen income redistribution for enrollees across all employment types.