Exclusion from a ‘mandatory’ pension scheme: Late-stage dropouts from the National Pension System in South Korea

In this study, we investigate an underexplored mechanism through which a mandatory pension scheme effectively excludes low-status older adults. We examine the patterns of individuals dropping out from the National Pension System just before the eligibility age, the largest public pension scheme in South Korea. We analyze administrative pension insurance data on individuals eligible for a lump-sum refund of lifetime contributions at age 60 due to insufficient contribution records – a negatively selected subpopulation. We employ a set of linear probability models with several fixed-effect specifications to investigate individual- and regional-level determinants of late-stage dropout. Results reveal a unique U-shaped relationship between the size of accrued contributions and the probability of dropping out, suggesting that immediate budget constraints could be the primary reason for dropouts among low-status workers. We also find that individuals with unstable labor market histories are more inclined to choose the refund option, while a regional economic decline is associated with an increase in withdrawals. We call for alternative policy approaches to protect the financially vulnerable and provide implications for other pension latecomer countries.