Better Administrating the Challenging

Groups in the National Pension in Korea

Jan 2010

Seong Sook Kim NPRI NPSHyungpyo Moon KDI

Ⅰ Current State of the National PensionⅡ Administrative Challenging Population

Groups in the National PensionⅢ Causes of Low Compliance to the Scheme Ⅳ Measures for Better Administrating the

Challenging GroupsⅤ Effectiveness of Contribution Subsidy

Ⅰ Current State of the National PensionⅡ Administrative Challenging Population

Groups in the National PensionⅢ Causes of Low Compliance to the Scheme Ⅳ Measures for Better Administrating the

Challenging GroupsⅤ Effectiveness of Contribution Subsidy

Current State of the National Pension

Ⅰ-1 Brief History of the National Pension

Expansion of Coveragebull 1986 legislationbull 11988 enforcement of the scheme

- workplaces with 10 workers or morebull 11992 expanded to the workplaces with 5

workers or morebull 71995 expanded to rural areas bull 4 1999 expanded to urban areas

Ⅰ-1 Brief History of the National Pension

Reformsbull 1998 First Reform- Pensionable age 60 rArr 65 (2013~2033)- Earnings replacement rate 70rArr60(from 1999)- Introduction of periodic financial review

bull 2007 Second Reform- Earnings replacement rate 60rArr40(2008~2028)

Ⅰ- 2 Applied Population by the N P

Size of the Insured as of the end of year(Unit 1000 workplaces 1000 persons)

Year Total Workplaces Regional Insured Voluntary Voluntary + continuous

WP Insured Total Rural Urban

rsquo88 4433 586 4431 - - - 14 03

rsquo92 5021 1204 4977 - - - 322 115

rsquo95 7497 1525 5542 1890 1890 - 487 158

rsquo99 16262 1861 5238 10822 2083 8739 329 1686

rsquo08 18335 9216 9493 8781 1941 6841 276 329

909 18614(1000)

9729 9894(532)

8647(464)

1914 6734 335(02)

389(02)

Ⅰ- 2 Applied Population by the N P

The Insured by sex (Sep 2009)(Unit )

Sex Total Workplace Regions Voluntary Voluntary ampContinuous

Total 1000 1000 1000 1000 1000

Male 612 639 589 257 305

Female 388 361 411 743 695

Ⅰ- 2 Applied Population by the N P

The Insured by age (Sep 2009)(Unit )

Age Total Workplace Regions Voluntary Voluntary ampContinuous

Total 1000 1000 1000 1000 1000

Under 30 199 233 162 06 -

30-39 294 332 252 59 -

40-49 293 281 309 235 -

50-59 211 154 277 700 -

60amp over 02 - 00 - 1000

Ⅰ- 2 Applied Population by the N P

The Insured by size of workplaces (Sep 2009)(Unit )

Under 5 5-9 10-49 50-99 100-499

Workplace 631 205 140 13 09

Insured 139 130 258 88 164

500-999 1000-2999 3000-4999 5000-9999 10000 amp over

Workplace 01 00 00 00 00

Insured 53 64 26 26 52

Ⅰ- 2 Applied Population by the N P

The Insured in regions with exemption from contributions (Sep 2009)

(Unit )

Total insured

Total insured in regions

Urban Rural

1000 1000 1000 1000

The insured with earnings declaration -

420(1000)

400(742)

490(258)

The insured with contribution exemption

270 580(100)

600(806)

510(194)

Ⅰ- 3 Size of Pensioners and Benefit Level The Insured by size of workplaces (Sep 2009)

(Unit 1000 persons )

65 or more in total

Basic Old age Pension

NP+Public Occupational No benefit

5210(1000)

3563(684)

1377(NP1195 PoP 182)(264)

953(183)

Only BOAP 553 NP+BOAP 131Only NP or POPs (133))

Administrative Challenging Population

Groups in the NP

Ⅱ-1 Groups Excluded from the Application Types of the groups excluded from the

application (Sep 2009)(Unit 1000 persons )

Types persons

Students amp military personnel aged 18 to 27 3344 251

Insured of public occupational pension 1450 109

Pensioners of the public occupational pension 110 08

Beneficiaries of the Basic Livelihood 755 57

Pensioners of the National Pension 79 06

Spouses with no earnings 5534 416

Others 2048 154

Total 13320 1000

Ⅱ-2 Groups Exempted from Paying Causes of exemption from paying

contributions (Sep 2009)(Unit )

Total Unemployed Suspension from office

Cease of business

Hospitalization over 3 months

1000 759 19 87 02

National disaster

Economic difficulties

In jail Missing Schooling etc

00 68 02 07 56

Ⅱ-3 Groups not Paying contributions Rates of contributions collections

(11 Sep lsquo09~10 Oct lsquo09)(Unit billion won )

Total Workplaces The insured in regions Voluntary(+Continuously)

Total Urban Rural

1877 1671 201 156 45 5

881 938 584 588 569 1000

Ⅱ-4 The Insured with Low Earnings Average earnings of the insured by types

(Unit thousand won)

Average earnings in total

Workplaces The insured in regions

Average Urban Rural

Dec rsquo95 943 1053 577 - 577

Apr rsquo99 1096 1440 785 841 629

Dec rsquo08 1751 2012 1089 1119 1003

Sep lsquo09 1763 2016 1073 1101 994

Causes of Low Compliance to the

Scheme

Ⅲ -1 Feeble Labor Market amp Economic Difficulties

Size and rate of affiliation to the NP among the insured as employees

(Unit 1000 persons )

Types 2004 2005 2006 2007

Temporary casualinformal

1540(316) 1630(329) 2100(255) 2170(231)

Temporary casualformal

1870(411) 1930(454) 13080(324) 3030(301)

Regularinformal 1520(969) 1420(979) 1500(977) 1720(985)

Regularformal 5940(981) 6260(993) 6530(985) 6800(994)

Total 10860(787) 11230(802) 13220(714) 13720(719)

Ⅲ -2 Defective Infrastructure for Good Administration

Vulnerable to catch the earnings activities and earnings of the insured in regions appropriately- Gradual improvement but yet enough

Ⅲ -3 Mistrust on the National Pension

Misunderstanding of the National Pension- Difficulty of understanding the complicated social insurance pension

Short history of the National Pension- Pensioners are much better than the insuredin the level of trust

- Gradual increase of trust in the N P

Measures for Better Administrating the

Challenging Groups

Ⅳ - 1 To Promote Contribution Careers

Activating the delayed payment of contributions and the return of lump sum refund

Subsidizing contributions to the low income earners

Expansion of credits Activating voluntary affiliation Reduction of minimum qualifying years

Ⅳ - 2 Improvement of Administrative Capacity

Promoting the transition of the insured status to the insured in workplaces

Improvement of infrastructure to seize earnings appropriately

Consolidation of collection organizations

Ⅳ - 3 Improving the Trusts in the Scheme

To promote the insuredrsquos understanding tothe NP- Giving better and more customer-oriented services

Gradual increase of the insuredrsquos interests in the NP as the NP matures

Effectiveness of Contribution Subsidy

Empirical Examination

Ⅴ- 1 Policy Options for Coverage Expansion Option1 Introduction of non-contributory universal

basic pension- Due to rapid population aging the BP expenditure alone will take

up 72~96 of GDP in 2050 (avg rep rate 15~20)- When financed by VAT the tax rate (currently 10) should go up

to 21~29 by 2050

Option2 Providing compliance incentives thru contribution subsidy

- How effective is the contribution subsidy in enhancing coverage ofthe challenging groups

- Who should be the targeted groups

Ⅴ- 2 Current Contribution Subsidy for FarmersFishermen

Beneficiaries persons who are engaged in agricultureforestry livestock or fishery businesses(farmers and fishermen)

Subsidizing period 1995 ~ 2014

Financing tax-financed (Special Accounts for Agricultureand Fishery Structure Adjustment)

Subsidy amount

- if monthly income le SIA 45 of income (12 of contribution)

- if monthly income gt SIA 45 of SIA (fixed amount)

SIA(Standard Income Amount) 3-year average income of the total insured

Ⅴ- 3 Effectiveness of Contribution Subsidy

Data Korean Welfare Panel Study KIHASA 2007- number of obs 1723(individually insured 18~59)

Model Probit Regression

Classification Regular Non-regular Self-employed Others Total

Workplace based

Insured

Paid 1977 (995) 180 (862) 75 (828) 14 (144) 2245 (943)

Unpaid 10 (05) 29 (139) 16 (172) 81 (860) 136 (57)

Sub Total 1987 (834) 209 (88) 91 (38) 95 (40) 2382 (100)

Individually Insured

Paid 120 (526) 108 (324) 461 (673) 134 (284) 824 (479)

Unpaid 108 (474) 227 (676) 224 (327) 340 (716) 899 (522)

Sub Total 228 (133) 335 (195) 685 (398) 474 (275) 1723 (100)

exempted 80 (739) 166 (730) 109 (489) 298 (878) 653 (727)

default on premiums 28 (261) 61 (270) 115 (511) 42 (122) 246 (273)

Others include unpaid family workers unemployed economically inactive populationData Korean Welfare Panel Study 2007

Ⅴ- 4 Differences in Compliance Rates (1) Compliance rates of the subsidized farmers and fishermen are

highest throughout all income levels Non-compliance is pronounced among wage workers who are

mostly low-paid and temporarydaily workers

Data Korean Welfare Panel Study 2007

ltFiguregt Compliance Rates among the Individually Insured by Income Levels

563622

710 737 724662

616

725

9191000 1000

755

406

800

386

534

399

205

0

20

40

60

80

100

120

-10000 10000~20000 20000~30000 30000~40000 40000+ Total

Self-employ ed Farmers amp Fishermen Wage Workers

()

Ⅴ- 4 Differences in Compliance Rates (2)

Compliance rates are increasing with the higher age cohorts

Data Korean Welfare Panel Study 2007

ltFiguregt Compliance Rates among the Individually Insured by Age Cohorts

415

635 645

763

662

00

607

767 770 755

166

320

428

662

406

0

10

20

30

40

50

60

70

80

90

18~30 31~40 41~50 51~59 Total

Self-employ ed Farmers amp Fishermen Wage Workers

()

Ⅴ- 5 Effectiveness of Contribution Subsidy

The marginal effect of contribution subsidy to farmers and fishermen is statistically significant and robust

Among sub-groups the effect of contribution subsidy is significantly high when compared to wage workers

- Compared to other self-employed contribution subsidies areestimated to increase the compliance rates of farmers and fishermen by close to 10 percentage point

- Provision of similar subsidies to individually-insured wage workers may increase the compliance rates substantially

ltTablegt Regression Results (Probit)

Dependent VariablesIndividually Insured Self-employed

employer Wage Workers

model1 model2 model3 model4 model5 model6

Gender00175 00075 00059 -00004 00120 -00217

(0039) (0039) (0052) (0052) (0053) (0055)

Education00119 00142 00076 00101 00026 00060

(0006) (0007) (0008) (0008) (0009) (0009)

Age00162 00190 00204 00222 00042 00103

(0018) (0018) (0026) (0026) (0023) (0024)

Age200000 -00000 -00001 -00001 00002 00001

(0000) (0000) (0000) (0000) (0000) (0000)

ln d_income1)01762 01825 00805 00858 02747 02923

(0032) (0033) (0032) (0033) (0048) (0049)

d_agri01953 00939 03076

(0053) (0053) (0061)

of obs 1240 1240 690 690 706 706

Log pseudolikelihood -7797 -7744 -4199 -1486 -4256 -4141

Robust standard errors in parentheses plt001 plt005 plt011) adjusted for family size using n

Ⅴ- 6 Policy Implications(1)

There is a strong possibility that the provision of contribution subsidy can substantially increase the compliance rates of atypical workers with low wages

Contribution subsidy can be considered as a pre-emptive social investment as it will alleviatepoverty among the elderly in the future

It is much less costly compared to the introduction of non-contributory demogrant-type basic pension

Ⅴ- 6 Policy Implications(2)

How to design subsidy scheme

- provide incentives both to workers to participate in the NPP

- and to employers to convert the individually insured workersinto workplace-based insured

example 3(G)-3(E)-3(W) for very low-paid workers2(G)-35(E)-35(W) for low-paid workers

- need to consider the equity issue between workers and self-employed

Thank You