Mandatory Annuitization in the SME Pension Fund in Korea: Welfare and Retirement Adequacy

Abstract

The collective retirement pension fund for workers in small and medium‐sized enterprises (SMEs) has recently been introduced in Korea (the “Blue Seed” plan), yet retirement wealth is typically withdrawn as a lump sum, leaving retirees exposed to longevity risk. This paper studies the welfare implications and retirement income adequacy of introducing mandatory annuitization in the payout phase of the SME pension scheme. Using an optimal consumption and portfolio choice model, we compare optimal self‐drawdown with collective annuity provisions. While risk preference mismatches can generate welfare losses for highly risk‐averse members, collective annuities generally enhance welfare through mortality pooling. By evaluating adequacy under realistic public pension coverage scenarios, we find that collective annuitization consistently raises retirement income relative to self‐drawdown and substantially extends the period over which a subsistence‐level minimum is protected, though full coverage of adequate living expenses is reached only under the most favorable combination of retirement timing and public pension support.