Who bears the fiscal burden of the National Pension System? A Generational Acconting Approach

Abstract

We address the financial sustainability of the National Pension System (NPS) of Korea and the intergenerational inequity due to the system using generational accounting. We find thatthe current system is notfinancially sustainable and shifts the fiscal burden excessively to the future generations, even when the recent 2007 National Pension Act revision is reflected. Moreover, the parametric reform, which raises the contribution rate and alters the timing of the contribution adjustment, is not found to solve the problem of the system fundamentally. The prefunding, which raises the contribution rate before the NPS fund’s depletion, is effective to restore the fiscal soundness of the NPS and enhance the intergenerational equity, in the sense that it equalizes the net tax burden across generations. However, the revision plan increases the NPS fund excessively, and the market power of the NPS fund in the financial market, which causes the distortion of the behavior of the financial market participants. A more structural reform, which recovers the financial sustainability and minimizes the distortion of the economic behavior, should be prepared.