[Maeil Business News] No Country for Free Pension
- SKKGSB
- Hit9119
- 2022-11-03
Professor Youngju Nielsen (Faculty Chair of AI MBA, Associate Professor of Finance) has written a column about the stock market on MK News (Maekyung Economy).
The year 2022 has been tough for global financial markets. As a result, many of the world's public pension funds have recorded varying losses. Korea's National Pension Service, which concerns all citizens, is no exception. In fact, exceptions in this market situation should rather question the method of fund management. Inevitably, by the end of the year, more articles will raise the tremendous fear that people's retirement funds will disappear.
Unquestionably, the National Pension Service should continue to learn more from the market situation this year, and better manage the fund. However, it is unfair to criticize the National Pension based on this year’s returns. Instead, in order to create a win-win pension, the nation should apply what has been learned this year to organize a better management system in the future.
In this era of centenarians, many people are concerned about their retirement. Then, which country guarantees the best retirement plan, and what system makes that possible? According to the 2022 Global Retirement Index report by French investment bank Natixis, Norway has the best-secured retirement plan.
Norway, like Korea and other advanced countries, has a triple-layer pension structure consisting of the national pension, retirement pensions, and private pensions. However, the details are somewhat different from Korea's. The Norwegian pension aims to ensure no difference in income and living standards before and after retirement. Generally, the total pension is comprised about 60% from the pre-retirement income, 40% from the national pension, and 20% from retirement pension. In addition, since the post-retirement tax rate is much lower than that before retirement, the difference in disposable income after tax is negligible. On the other hand, after retirement, consumption tends to decreases with age, allowing retirees to feel no difference in their quality of life.
In Norway, seniors over the age of 66 can receive national pension, but people can apply in advance as early as 62 years old, and payments vary depending on the duration and amount of contributions, as in Korea. The amount can also vary depending on pension points that take into account other criteria. Pension points’ criteria include individual reasons such as spouse’s income, disability, industrial accidents, childcare duties, and unpaid community service. If someone pays an amount worth more than five years of the Norwegian national pension, then that person becomes eligible for pension points.
So what is the minimum amount one can receive under the Norwegian pension system? The Norwegian system has its own philosophy in pension calculation. Every year, three parties—the government, unions and corporations—agree on a value called G, which represents the minimum annual allowance per person. Yes, this is allowance, not cost of living. G in 2022 is 111,477 krone, equivalent to 15 million Korean won under the October exchange rate. 2G, about 30 million Korean won, is the minimum annual pension in Norway. This is the basic thinking, though there are many particular rules.
The maximum annual pension can be 7.1G, which is a little over 100 million Korean won based on the current exchange rate. Of course this is under the extreme condition that the recipient has paid into the national pension for 40 years from the age of 13.
The next question can consider how much one should pay monthly into the Norwegian national pension. Salaried workers pay 8% of their salary, while their employer pays 14.1% if the company is located in the capital, Oslo. The company’s share changes depending on location. In Oslo, the total pension payment is 22.1%, which is by no means small. Even in one of the richest countries with enormous natural resources such as petroleum reserves, and with the world's most exemplary public fund management system, there is no free retirement plan.
Original article in Korean: https://www.mk.co.kr/opinion/contributors/view/2022/10/968084/