Recently, the proposal to move severance pay into a funded system has resurfaced frequently, with plans to transition to a pension fund model. Implementation has stalled due to opposition from labor unions. The latest proposal references the South Korean model. Fifteen years ago, South Korea reformed its approach and integrated severance pay into individual retirement schemes; today, Korean pension funds have grown substantially, reaching an estimated $365 billion.
New Proposal for Severance Pay
For some time, authorities have discussed reworking severance pay within an individual retirement framework. Current proposals envision redesigning the voluntary private pension system from the ground up into a supplementary pension scheme. Under this model, severance pay would be integrated with private pensions, creating a combined structure that includes contributions from workers, employers, and the state. Critics have raised objections to several aspects of the plan, leaving open the question of what safeguards would be put in place to protect workers’ rights and benefits.
Looking at pension structures worldwide, many countries organize pensions across three tiers. The first tier is a public, social-security-like system provided by the state. The second tier typically consists of employer-sponsored private pensions, common in developed economies and often referred to as occupational or workplace pensions. The third tier involves individual savings-based pension products where people contribute their own funds into investment vehicles. The proposed reform seeks to situate severance pay within this broader multi-tiered landscape by folding it into the second or third-tier arrangements.
South Korea Comes Up as an Example
In Turkey, participation in the individual pension system was made mandatory in 2017 for certain groups, but perceived shortcomings have prompted proposals for further change. The current idea aims to create a genuinely contributory system in which employers would match or contribute to workers’ accounts and the state would also provide support. The resulting model—funded by employee and employer contributions, reinforced with state subsidies—would be called a supplementary pension system. One intended outcome is the creation of a funded severance pay arrangement; however, this raises concerns about possible unintended consequences and how protections would be enforced.
Among global examples, South Korea stands out as a country that integrated severance pay with private retirement plans. Its reform, implemented about 15 years ago, has operated without major publicized problems. South Korea employs a three-tier pension model similar to many other nations. In addition to a public pension system, Seoul introduced a national pension program in the late 1980s, enrolling everyone aged roughly 18–59 and requiring a minimum of 10 years of contributions. Retirement age for both men and women was set around 61. Later, South Korea reworked its severance pay arrangements and made employee participation compulsory in employer-funded plans. Under the former system, employees who left a job after one year could receive the equivalent of 30 days’ pay for each year worked, funded by employers.
Change Implemented in 2005
In 2005, South Korea converted traditional severance payments into pension-like plans. Employers and employees can choose private retirement plans, with employers contributing toward their workers’ retirement accounts. Contributions are incentivized by tax benefits provided by the government. Withdrawals are restricted: employees generally cannot freely access funds except for specific circumstances such as purchasing a home, company bankruptcy, or natural disasters. While the Korean model has functioned effectively in that context, some in Turkey worry that a similar move could disproportionately favor employers unless robust protections and transparent regulations are established.