Designing an Alternative Public Pension Scheme: A Korean Case Study

Abstract

The trends of ageing population and slow economic growth have become a major concern for public pension schemes with the defined benefit (DB) type. To mitigate the impact of this trend and secure long-term financial sustainability, several countries have recently adopted notional defined contribution (NDC) schemes. In this paper, we show how to apply an NDC scheme to the public pension system of Korea, arguably the fastest ageing country. In particular, we create a new pension system by combining the current Korean pension scheme and an NDC. Through simulations it is shown that the proposed scheme can reduce the financial instability caused by the changes in demographic and economic factors, while retaining the income redistribution component. We further consider applying a German-type automatic balancing mechanism to the proposed scheme, by using the average income to determine the return rate of the fund, to make it sustainable in the long term.