Research Report
Ⅰ. Background and Purposes
□The current Old-Age Income Security system for the self-employed consists of multi-layered programs in appearance. However, in fact, over 40% of the self-employed are not members of the National Pension, and thus, hidden in the blind spot.
□This study emphasizes the necessity of government support which should enable the self-employed to prepare themselves for likely poverty and to live their stable lives in later years by utilizing National Pension, Private Pension and Retirement Pension (planned to be implemented).
□The study also aims to grasp the internationally oriented tendency and status of the social security system of Korea based on the analysis of legislative systems of foreign countries, and to provide the basic data in order for Korean policy makers to establish the direction of the system improvements.
Ⅱ. Major Contents
□The definition of the self-employed has not been articulated by relevant laws. It generally means any business operator, not as an employee.
○According to the Labor Standard Act, the self-employed is not considered an employee but an business operator.
○The ‘Owner-Operator’ used in surveys conducted by the National Statistical Office is the generic term for the self-employed which means both employee-hiring ‘employer’ and, ‘individual proprietor’ working alone without employee or aided by unpaid family members.
○In relation with social insurance laws, a comprehensive concept of the self-employed is to be established. This study defines the self- employed as the concept for the generic term implying any ‘one-man business operator’, the unpaid family member and the employer.
○The scope of the small-scale self-employed can be matched with the small-scale business as defined in the Value-Added Tax Act, i.e. any business with the annual sales under 48 million Korean Won coming under the category of the ‘simplified taxation business’ and ‘tax-exempt business’.
□The Old-Age Income Security System of Korea consists of the National Fund as the first layer, Retirement Pension and Private Pension, as they are a part of personal pension system, as the second and third layers. In 2017, the self- employed will be allowed to take out individual retirement pension. Then, the multi-layered frame of the Old Income Security System shall be completed formally and institutionally comprising both public and private pensions.
□The rate of Pension Premium is 9% of the base monthly income and the self-employed should pay all the premium by themselves. This high level of rate serves as the cause for the small-scale self-employed to avoid joining the pension system.
○The employees and the business owner of any business of which workers are under 10 persons can be subsidized the half to 1/3 of the pension premium to be paid according to the monthly average income.
○Such subsidy of pension premium as stated above is not applicable to the small-scale self-employed whose income is equivalent to the monthly average income level eligible for the subsidy.
□In U.K., the Old-Age Income Security System for the self- employed is basically directed toward the minimum income security with basic pension or pension credit system, and toward the income security for the lower income group through national second-layer pension system. It presents a strong dependence on personal pensions and, at the same time, requires a reinforced national regulation.
□In Germany, the Old-Age Income Security system for the self-employed consists of two ways; as to the low-income self-employed, the obligatory subion to legal pension is actually allowed, and as to the high-income self-employed, the income security should be guaranteed by Rurup pension, a kind of personal pension. In 2012, German government prepares a pension reformation policy to impose the obligatory subion to legal pension on the self-employed.
□In Korea, the improvement of the Old-Age Income Security System has been made mainly to expand the subsidy of the pension premium for the small-scale self-employed and to induce their unpaid family-member workers to join the pension and then pay the equal minimum premium.
○As for the personalized retirement pension planned to be implemented, 56.6% of total self-employed were reported in a survey to be interested in joining it. The self-employed should pay all the premium by themselves at the rate of 8.3% of the annual income based on their income report.
-Provided the substitution rate of the appropriate income is based on pension subion period for 40 years, it is expected that the subion rate of the self-employed to National Pension should reach at least 40% level, to retirement pension 22%, and to private pension 8%.
○In order for the self-employed to acknowledge the importance of the subion to pension system, to get increased economic incentives, and to be guided to join the personalized retirement pension, the related legislation and enactments should be accompanied.
-The necessity of special legislation for the implementation of the personalized retirement pension for the self-employed is raised. In such legislation, it is considered that an Official Mutual Aid system for the self-employed can be established and gradually absorbed to such pension system.
-In consideration of the special status of the self-employed, it is necessary to offer them a flexible payment of pension premium which, for them only, allows to pay freely, to some extent, without limiting the allowance of the advance payment of the premium according to a certain age level.
○In accordance with the Restriction of Special Taxation Act, personal annuity savings eligible for the tax favor means the private pension as the third layer of the old-age security, i.e., the taxation-qualified private pension. Premium can be determined within the maximum limit of Korean Won 1,000,000 and should be paid totally by individuals and the favor of income tax deduction shall be applied to the annual maximum limit of Korean Won 4,000,000. The limit of income tax deduction should be increased continually.
○In relation with the identification of income of and the subsidy of the pension premium for the self-employed, the utilization of the Earned Income Tax Credit(EITC) should be taken into consideration since it is functioning as a part of social safety net, being a de-facto work-related income-supporting program.
-The payment of EITC to the household of worker or business operator(e.g., insurance solicitor, tradesperson) shall be determined in accordance with the number of dependent children, total income and business income.
-In connection with the subsidy of the pension premium, the utilization of Earned Income Tax Credit(EITC) could get the basis that the reported income of the self-employed can be effectively identified.
Ⅲ. Expected Effects
□The systematic establishment of multi-layered policies for old- age income security is to be planned and improved. And the improvements in legal system should be prepared for the purpose of such establishment.
○In order to prevent the old-age poverty for the self-employed, it is required that income security system be better organized and the related legislation and enactments should be followed to improve the status.
□In response to the ageing population, and the consequent changes in labor market and economic situation, it is expected to guide and lead the self-employed in the blind spot of National Pension to join the public and private pensions.