“National Pension Nears Insolvency,” IMF Urges Extension of Retirement Age and Pension Eligibility, Final Piece Is Wage-System Overhaul

National pension eligibility needs to be raised to 68
Pension fund projected to be fully depleted by 2065
Employment and wage-system redesign also urgent

The International Monetary Fund (IMF) has taken the unusual step of explicitly raising the issue of extending Korea’s statutory retirement age in a new report. While the IMF argues that Korea’s rapid demographic shift—marked by plunging birthrates and accelerating population aging—makes a larger labor force indispensable, it also warns that simply lengthening the legal retirement age will have limited impact. This aligns with domestic calls to shift the seniority-based pay structure toward a job- and performance-based system. Under the current structure, extending the tenure of highly paid older workers could lead companies to curtail new hiring.

IMF: “Retirement age to 65, pension eligibility to 68”

In its “Special Report on Korea’s Retirement-Age Extension” released on the 25th, the IMF offered a detailed assessment of older-worker employment trends. It classified older workers as those aged 50 or 55 and above, depending on statistical criteria, and concluded that despite earlier retirement compared to other advanced economies, Korea’s older population remains in the labor market for a longer period.

Domestic statistics support this pattern. According to the National Data Office, the employment rate for those aged 60 and above rose from 36.2% in 2010 to 48% in the third quarter of this year—a 12.2-percentage-point increase over 15 years. Over the same period, the youth employment rate for those aged 15 to 29 rose only marginally from 40.4% to 45.3%. Employment among older workers has expanded so significantly that it has overtaken youth employment.

The IMF acknowledged that older-worker participation plays a useful role in filling labor-market gaps in Korea. It also viewed statutory retirement-age extension as a potential institutional tool to further close those gaps. However, the Fund argued that as working lives lengthen, pension eligibility must be adjusted accordingly. Under the current system, Koreans contribute to the National Pension until age 60 and become eligible to receive benefits at 63. By 2033, eligibility will increase to 65. Labor groups contend that because retiring at 60 and receiving benefits at 65 creates a five-year income gap, extending the retirement age is essential.

But the IMF countered that long-term fiscal sustainability must take precedence. It proposed raising pension eligibility to 68 if the statutory retirement age is lifted to 65. “The OECD estimates that increasing pension eligibility to 68 by 2035 would boost total employment by 14%,” the IMF noted. In other words, only when retirement-age extension is paired with later pension eligibility will older-worker participation expand meaningfully.

National Pension running daily deficit of USD 607 million

In reality, the National Pension Fund is accumulating a deficit of USD 607 million per day. This stems from a structural imbalance: beneficiaries receive more in pension payouts than contributors pay in. Actuarial balance requires contribution rates of 19.7% of income, but the current rate is only 9%. Meanwhile, the demographic squeeze—fewer contributors and a growing number of beneficiaries—continues to worsen. At the current trajectory, the pension fund will be depleted by 2057. For those born in 1990, the fund will run dry just as they become eligible for benefits, forcing subsequent generations to contribute as much as 35% of their income. Sustainable reform will require either contributing more and receiving less, or contributing more while keeping benefits unchanged.

Although a reform bill passed by the National Assembly in March pushed the depletion date back by eight years to 2065, the underlying conflict remains unresolved. Many older citizens continue to demand higher pension payouts, calling for both contribution rates and replacement rates to be increased. While it would be ideal to contribute more and receive more, raising benefit levels undermines the positive fiscal effects of higher contribution rates.

According to the National Assembly Budget Office, raising the replacement rate by two percentage points would require an additional USD 431 billion, while a three-percentage-point increase would require USD 651 billion. Yet even such costly increases would do little to bolster retirement security. Korea’s replacement rate is low largely because contribution histories are short. The system is based on a 40-year contribution period, but only 19% of beneficiaries have contributed for 20 years or more. And with half of Koreans aged 65 or older not enrolled in the pension system at all, higher replacement rates alone cannot resolve elderly poverty.

Experts therefore argue that rather than raising replacement rates—which would strain pension finances—Korea should strengthen real income security through structural reform. Extending the mandatory contribution age from the current 60 to 65 would yield the same effect as a five-percentage-point increase in the replacement rate. The OECD also endorses this approach. But extending contribution periods is impossible without extending employment.

Seniority-based wage structure incompatible with retirement-age extension; wage-system overhaul essential

Without reforming the seniority-based wage system and expanding employment flexibility, extending the retirement age risks shrinking youth employment, intensifying generational conflict, and inflating corporate labor costs. Companies could scale back hiring to offset the higher wages of older employees. According to the Bank of Korea’s report “Super-Aged Society and Continued Employment Strategies,” after Korea raised the statutory retirement age from 58 to 60 in 2016, employment among workers aged 55 to 59 increased by 1.8 percentage points (about 80,000 people) through last year, while employment for those aged 23 to 27 fell by 6.9 percentage points (about 110,000 people).

For this reason, business groups are calling for a comprehensive overhaul of the wage system, including the adoption of job-based pay systems that set wages based on job complexity and responsibility. They also urge the government to expand options for continued employment, such as reemployment after retirement. Japan—having entered a super-aged society earlier than Korea—maintains a statutory retirement age of 60 but requires employers to choose one of three employment-guarantee mechanisms through age 65: extending retirement age, abolishing retirement age, or rehiring retirees. Kim Deok-ho, adjunct professor at Sungkyunkwan University’s Graduate School of Governance, said, “Rather than imposing a uniform retirement-age extension, companies should be allowed autonomous continued-employment models, supported by greater employment flexibility and wage-system reform. Korea needs a solution that balances youth employment, corporate cost burdens, and generational equity.”

Alternatives to the traditional model—where older workers work full eight-hour days—are also being considered. These include reducing daily work hours by two to three hours or using savings from wage-peak programs to fund youth hiring. Oh Gye-taek, senior research fellow at the Korea Labor Institute, said, “Wage-peak savings should be redirected toward youth employment, and advance hiring plans should be aligned with expected retirements. A rational wage-system overhaul would also strengthen worker motivation.”

Experts also argue for relaxing restrictions that make it difficult to dismiss full-time permanent employees. Korea’s rigid labor market has long been cited as a drag on emerging-industry growth. Because regular workers enjoy strong dismissal protections, companies have expanded the use of nonregular, subcontracted, and dispatched labor to retain flexibility—resulting in a system where nonregular workers are the first to be dismissed during economic downturns.

Yet immediate labor-market liberalization remains politically challenging. Employers worry about added costs needed to expand the social safety net, while labor groups fear heightened job insecurity. Experts therefore stress that Korea must develop “flexicurity” policies—balancing flexibility and security—through social dialogue among government, employers, and workers. One economist cautioned, “Overly abrupt changes can create new economic problems. Korea should study global best practices from countries that are both institutionally advanced and economically resilient.”