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The old age income support system in Korea is at a crossroads. Traditional informal income support, which has mainly relied on inter-family transfer, is rapidly being replaced by a formal system. Following rapid economic growth and demographic change, reliance on the family for support during old age has given way to formal pension arrangements, mostly mandated by the government. During the next decades, the population in Korea is expected to age rapidly. This ageing will incur high costs for the maintenance of current public pension systems. It is expected that the financial instability of public pension programs will be inevitable without fundamental reform. Civil servants and teachers are already beginning to run deficits. The National Pension Scheme (NPS) promises benefits which cannot be sustained without doubling payroll taxes or running large deficits in the future. Meanwhile, mandatory employer-based, retirement benefits are effectively unfunded and unregulated. The design of a pension system which will be sustainable in the long term is an urgent problem in the Korean old age income support system. The pension system must be fiscally sustainable and fair to future generations. Existing formal pension schemes are financially unstable and impose a large burden on future tax payers. This article attempts to analyze the reason that the balanced development of public and private pension scheme in Korea is necessary. To attain this goal, optimal income replacement rate provided by the old-age income support system, the sustainability of pay-as-you-go financing method in Aaron test`s perspective, the expansionary effect of pay-as-you-go pension program in median voter`s perspective, and the generational imbalance in generational accounting are presented, respectively. The article suggests that a multi-tier system would operate more efficiently than any system that relies heavily on any one tier. According to that reasoning, this article recommends a four-tier system as a desirable model. A four-tier system recommended by this article is as follows. The first tier is a bottom anti-poverty tier. This pillar is means tested, and financed from general revenues. It would provide income support for those without other means. The second tier is a pay-as-you-go defined benefit type. A mandatory and publicly managed second pillar would provide a moderate replacement rate. The third pillar is defined contribution type which is mandatory and managed by private pension agencies. It would provide a pension by means of annuities. The fourth pillar is defined contribution, which is voluntary, and managed by private pension agencies. There are many different ways of structuring a pension system. The future of pension schemes, however, is evolving very rapidly. Obviously there is no single system which fits all circumstances, and the question of what is the most appropriate system has to be weighed against the other factors, in particular such as financial stability, universal coverage, and good governance.
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