Social security pertains to social protection programs created by the government to provide individuals with a degree of income security, especially when faced with contingencies related to unemployment, old age, incapacity, disability, survivorship, child rearing, as well as to offer access to either preventive or curative medical care (ISSA, 2013). The International Social Security Association or ISSA defined social security to include social insurance programs, social assistance programs, universal programs, mutual schemes, national provident funds, and other arrangements that is defined and form part of the social security system of a country . Most countries today have adopted some type of social security system of which the most common programs are for old-age, disability, survivors’ pension, sickness and maternity, benefits for work- or occupational- related diseases and injuries, unemployment and family allowances (ISSA, 2013). Likewise, social security system was devised and designed in a way that reflected the social and economic situations as well the income structure and labor market system of each country (Kim & Lee, 2010).
In this paper, the student aims to discuss the current state of social security and social insurance in Korea. According to the report of OECD (2011), the economic development of Korea over the past 50 years has been noted as one of the most rapid development which has also been sustained so far. Since 1960, Korea has been transformed to become one of the leading industrial nation and the world’s eighth largest exporter from its previous state of being one of the poorest countries in the world (OECD, 2011). However, the country is confronting a serious social policy challenge relating to its population ageing and widening income inequality that can potentially economic growth.
Social Security Expenditure: A Historical Perspective
The social security system of Korea is comprised of social insurance, public assistance and the social welfare service; the benefits consist of national pension, national health insurance, and worker’s compensation insurance. The goal of the social insurance schemes is essentially to secure and protect individuals’ income, health and employment.
As presented by Kim and Lee (2012), the government’s expenditure on social security is divided into three portions namely: public assistance, public welfare services, and social insurance. The social insurance takes up a major part which only implies that the social insurance system is the most important welfare system in Korea.
Figure 1: Social Security Expenditure in Korea: 1990-2007
Figure 1: Social Security Expenditure in Korea
Source: Kim & Lee , 2012
Figure 2: Social Expenditure as Portion of Total Government
Source: OECD Database 2013
Moreover, the OECD (2013) data also indicated the increasing spending of the Korean government for social security (Figure 2). However, the social spending which is on the average at 7.5% of GDP is still below the OECD average of 20% reflecting Korea’s relatively young population, the limited coverage of health and long term care insurance and the immaturity of the pension system (OECD, 2011).
Social Security Payment System
Korea adopts the defined-benefit or Pay-As-You-Go (PAYG) payment system (which is the type of social security program common to all OECD member countries including Korea). The social security system of Korea is composed of a government determined amount that does not reflect the actual contribution of individuals who are paying into the system. Ideally, under a balanced system, the current amount of contribution must equal the amount being granted to the current retirees. But, this setup is found to be highly susceptible to changes in demographics and imbalances may occur in a given period.
Dependency Ratio (Demographics): Changes Over Time
The World Bank reported in 2012 that the Age dependency ratio (% of working-age population) in South Korea was at 37.88 in 2011. Age dependency ratio is the ratio of younger people age 15 and below or older people age 64 and above who are dependent to the working-age population comprising of individuals between ages 15 to 64. Figure 3 depicts the declining dependency ratio of population younger than 15 or older than 64.
Likewise, the dependency ratio of older population, specifically which is taken as a percentage of the working-age population. As reported by the World Bank (2013), the ratio of population older than 64 years who are dependent on the working-age population has been noted to be increasing, and at the ratio of 15.89 in 2011 (Figure 4).
Figure 3: Dependency Ration (% of working –age population)
Source: The World Bank Database, 2013
Figure 4: Dependency Ratio, old (% of working –age population)
Source: The World Bank Database, 2013
The data from the World Bank reveal the current concern in most OECD countries, i.e., the increasing pressures on pension systems as the ageing population are increasing at accelerated phase. This has significant impact to Korea. The dependency ratio measure of 15% indicates that Korea is currently one of the countries in the OECD members to have the youngest populations. But looking 50 years ahead, the old-age dependency will be 77%, that will make Korea as the second among OECD countries with the oldest population next to Japan (OECD, 2011). This implies that with the ageing population, will Korea able to sustain economic growth with declining productivity of old-aged citizens?
Income Distribution Among Aged Population
Among the OECD member countries, Korea ranks 34th country with the lowest disposable income of elderly citizens. Also, the relative poverty of this group of elderly citizens is the highest relative to the OECD members. In terms of the income distribution index, as indicated in the World Bank country data, the index is low revealing the realities that Korean elderly citizens are unsecured socially and economically after retirement.
It is observed that among age group 66 to 75 years old, the ratio of disposable income to per capita income is at 62% of the average income of the entire population of Korea. The ratio of disposable income among age group 51 to 65 to the per capita-income is at 103 percent. However after retirement (among age group 65 and above), the ratio of disposable income to per capita income sharply falls (OECD, 2013).
In terms of poverty ratio, the elderly citizens is already at the critical level. Almost forty-six percent of the individuals in the age group of 66 to 75 have a median income that is 50 percent or even less relative to the national average. This implies that 46 out of 100 elderly ae living with income which are lower than middle income earners.
Elekdag (2012) attributed the elderly’s poverty situation to early retirement, insufficient social safety network and rigidity in the labor market. It was noted that the age for retirement among employed individuals is 55 years old. It was observed however that workers retire earlier.
Structure of Social Security Tax, Employers and Employees Contribution
Under the National Pension Program (NPP), the contribution is 9%, of which the employer and employee contribute 4.5% .
Under the Government Pension Program (GPP), the contribution is 17% of which employer and employee contribute 8.5% each..
Under the National Health Insurance Program (NHIP), the contribution is 5.8% of which the employer and employee are required to contribute 2.9% each.
The ceiling of salary for the calculation of contribution amounts to KW 3,890,000 every month. Meanwhile the minimum salary is KRW 240,000 monthly.
Structure of Social Security Benefits
The retirement age is 60 years for both male and female; 55 years old for employees with certain special occupations. This year, 2013, the retirement age is raised to 61 years old and will be raised by a year every five years period until it reaches 65 in 2033.
The retirement benefits old age pension under NPP include the basic pension amount or BPA and the dependents’ pension or DPA.
The social security benefits also include disability benefits disability pension of which the grant is determined by the degree of disability, that is 60% to 225% of the basic amount plus dependents’ pensions.
Also, the government provides death benefits survivors’ pension which covers 40% to 60% of the basic pension plus dependents’ pension upon death of the recipient of an old age or disability pension. There is also a funeral grant that amounts to three times the final monthly salary of the recipient.
Medical benefits are also compulsory for all employees in companies.
Retirement Age and Benefits
The retirement age required for NPP and GPP is 60 years old, which is applicable for both male and female individuals. Early retirement is at 55 years old.
Moreover, there are certain conditions to avail of retirement benefits. The individuals must be insured for 20 years or longer and have reached the requirement age of retirement. In the case of early retirement, individuals must have a minimum contribution equivalent to 10 years and currently not employed. For the active old age pension, the elderly must have the minimum of 10 years coverage while remaining employed.
Social Security Reforms
The OECD (2011) have presented policy recommendations for the government of Korea’s social security system reform. According, effective social policy protects individuals and helps them overcome poverty, inequality, discrimination or other adversities, thereby enabling them to lead fulfilling lives (OECD, 2011). The recommendations for reform include: (reducing old-age poverty should be the priority of all short- to medium term pension reforms; (2) accelerate the increase in the pension eligibility age from 60 to 65 to help ensure the financial sustainability of the National Pension Scheme; (3) encourage the development of the company pension system based on define contributions, in part, by eliminating the favourable tax treatment of the retirement allowance; (4) limit the increase in long term care spending by shifting it from hospitals to LTC facilities or home based care; (5) contain the burden of LTC spending on the working age population by increasing the share financed by retirees; (6) reform the payment schemes for health care by moving away from fee-for-service and improve quality control systems to get better value for investment; and, avoid cost-containment efforts that might increase the already high out-of-pocket spending by patients, thereby undermining the universal access.
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