South Korea's unemployment insurance system faces mounting financial strain as a record-high surge in new benefit claims, coupled with rising fraud and expanded spending on unrelated programs, highlights growing vulnerabilities amid an economic slowdown. /Koh Un-ho

The number of new applications for unemployment benefits in South Korea last month hit a record high for November, signaling a red flag for the financial sustainability of the unemployment insurance system.

While the primary driver was an economic slowdown leading to job losses, widespread perceptions of unemployment benefits as “free money” have fueled a surge in fraudulent claims. Critics also argue that reliance on the unemployment insurance fund to cover costs like parental leave benefits is exacerbating the fund’s financial woes.

The Ministry of Employment and Labor announced on Dec. 9 that 90,000 new applications for unemployment benefits, officially known as job-seeking benefits, were filed last month, marking a 2.2% increase (or 2,000 applications) compared to the same period last year. This figure represents the highest for November on record.

As new applications surged, the total number of beneficiaries receiving unemployment payments in November reached 543,000, an increase of 1,300 (2.5%) year-on-year. Total disbursements for the month stood at 842.6 billion won ($590 million), up 1.5% ($87.5 million) compared to a year earlier.

Unemployment benefits in S. Korea are available to involuntary jobseekers who have been covered by employment insurance for at least 180 days in the 18 months before filing a claim. The rise in new claims reflects worsening labor market instability amid an economic downturn. The number of new job postings on the ministry’s WorkNet job portal dropped by 30.8% year-on-year to 165,000 in November, while new job seekers using the platform fell by 5%. The steep decline in job openings has likely discouraged many from even starting their job search.

Adding to the strain on the system are widespread cases of fraudulent claims. Applicants must prove they are actively seeking reemployment, but some collude with employers to submit false claims or fabricate job search activities with fake documents.

According to Kim Wi-sang, a lawmaker from People Power Party and member of the National Assembly’s Environment and Labor Committee, cases of individuals receiving warnings for failing to demonstrate proper job-seeking efforts jumped from 1,024 in 2022 to 55,849 in the first seven months of this year.

Critics link the surge in fraudulent claims to changes introduced in 2019 that raised unemployment benefits from 50% to 60% of average wages and extended the payment period by one month. This has created a perception that not claiming unemployment benefits amounts to a financial loss, with some beneficiaries now guaranteed more than $1,050 per month without working.

The government’s handling of the unemployment insurance fund has also drawn criticism for worsening its financial condition. Efforts to address S. Korea’s low birthrate, such as increasing the monthly cap on parental leave benefits from about $1,050 to $1,750, have been funded by tapping into the unemployment insurance account. The fund is financed by employment insurance premiums paid by employers and workers.

As of the end of last year, the unemployment insurance account had an accumulated deficit of $2.7 billion when factoring in approximately $5.3 billion borrowed from the government’s Public Capital Management Fund. While borrowing from the fund allows the government to record the loans as revenue, critics argue this masks the reality of running the system on debt. If the current spending pattern continues, experts warn the government will either need to raise employment insurance premiums or take on more debt.

To address the shortfall, analysts say the government must increase its direct contributions to the fund. While the administration has allocated $447 million in subsidies for next year, experts estimate that an additional $1.3 billion to $2 billion from the national budget will be needed to stabilize the system.