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Video Description

Type: KIHASA Policy Featurette

Topic: Shouldn't the return on retirement pensions at least be higher than the inflation rate?

Guest Speaker: Professor Kim Woo-chang, KAIST

Transcript

Improving retirement pensions would play a significant role in enhancing income security in old age. Additionally, Bank of Korea Governor Rhee Chang-yong recently pointed out that we should have transformed our economy to be service-oriented, but we failed to do so because we were intoxicated by the rosy prospects that China’s economic growth seemed to signal for Korea.” I fully agree with him. Such a transition requires a catalyst, or priming water. In the case of the United States, for example, this was retirement pensions. Retirement pensions have this potential, but the problem is that retirement pensions in Korea are not functioning like retirement pensions at all. Not only have we not yet launched a retirement pension system on a national level, but the returns on existing schemes are also very low. Despite the investment market performing exceptionally well between 2020 and 2021, the average return on retirement pensions was merely about 2%. Why were returns so low? It turns out that about 90% of retirement pension subscribers have opted for principal-guaranteed products. Only about 10% have invested in growth-oriented options, similar to how the National Pension Fund manages its portfolio. These subscribers chose to invest their retirement funds in performance-based or risk assets. If we assume someone subscribes to a retirement pension plan at age 30 and contributes for 30 years, it’s natural for the subscriber to experience occasional losses during that period. However, if losses are not tolerated at all, it becomes impossible for pension scheme to generate returns that outpace inflation.