2026 Minimum Wage Hike: Forecasted Changes to Welfare Benefits

The 2026 minimum wage increase is expected to directly affect the eligibility and payment amounts for major welfare benefits, including the Basic Livelihood Security System, beyond just boosting low-wage workers' income, potentially leading to changes for approximately 200,000 recipients.

Predicting Welfare Benefit Changes with the 2026 Minimum Wage Increase

Changes in Income Calculation Standards: Impact of Minimum Wage Hikes on Welfare Benefit Eligibility

Welfare programs like the Basic Livelihood Security System determine eligibility and benefit levels based on a household's recognized income. This recognized income includes various sources such as labor income, business income, and asset income. Crucially, when calculating labor income, the total wages based on working hours and the minimum wage level serve as important benchmarks. Consequently, a minimum wage increase leads to a rise in the nominal income of low-income households working the same hours. This, in turn, increases the recognized income, making it more likely for households that previously met the eligibility criteria to lose their benefits because their recognized income now exceeds the standard threshold after the minimum wage hike.

Projected Scale of Eligibility Changes with Minimum Wage Increase

The specific rate of increase for the 2026 minimum wage has not yet been decided. However, considering recent years' trends, inflation, and economic growth forecasts, a significant increase is probable. Experts analyze that an increase of over 10% in nominal wages, even with the current 30% deduction for labor income in the Basic Livelihood Security System, would lead to a substantial rise in recognized income. Referencing past minimum wage hikes, research indicates that if the entire wage increase is recognized as income, over 200,000 recipients could lose eligibility or see their benefit amounts reduced. These changes are likely to disproportionately affect single-person households and low-income households with employable members who rely on the minimum wage for their livelihood.

Analysis of Key Benefits within the Basic Livelihood Security System: Predicted Changes by Welfare Program

Livelihood Benefit Payment Fluctuations and Their Relation to the Minimum Guarantee Level

Livelihood benefits are calculated by subtracting a household's actual recognized income from the minimum guarantee level (imputed income). When household income rises due to a minimum wage increase, the recognized income also climbs. This narrows the gap with the minimum guarantee level, leading to a reduction in livelihood benefit payments. In cases where the recognized income exceeds the minimum guarantee level, recipients may lose eligibility altogether. This directly translates to a decrease in direct cash income for households, potentially exacerbating the difficulties faced by those struggling to make ends meet.

Potential Eligibility Changes for Medical, Housing, and Education Benefits

Medical, housing, and education benefits, which also determine eligibility based on recognized income, are susceptible to the impact of minimum wage increases. If a household loses eligibility for livelihood benefits, they are also highly likely to lose eligibility for supplementary benefits (medical, housing, education) due to the rise in recognized income. Specifically, for medical benefits, this could lead to increased co-payments for healthcare services. For housing benefits, it might result in losing eligibility for public rental housing or facing higher rent. Education benefits might see the exclusion from support for items like school supplies. The simultaneous loss of these multifaceted benefits has a positive side in reducing welfare dependency but could trigger sudden livelihood crises due to rapid changes.

Actual Impacts and Policy Challenges

Complex Effects of Increased Earned Income and Reduced Benefits

The reduction in welfare benefits resulting from a minimum wage hike can partially offset the nominal income increase. For instance, if the hourly minimum wage increases by 10% and an individual works 200 hours per month, their pre-tax income would rise by approximately 200,000 won. However, if the recognized income increases after deductions for labor income calculation, and livelihood benefits consequently decrease by 150,000 won per month, the actual net income increase would only be 50,000 won. Therefore, the perceived income increase from a minimum wage hike may be smaller than expected, potentially leading to a sense of relative deprivation among low-wage workers.

Necessity of Addressing Welfare Gaps and Strengthening Safety Nets

Recipients losing welfare benefits due to a minimum wage increase may be categorized as having 'left welfare due to increased earned income,' potentially leading to the assumption of lower demand for new welfare services compared to existing recipients. However, this could be a temporary situation. There is also a risk of falling back into poverty due to a slight income increase that exceeds benefit thresholds, or due to inflation outpacing wage gains. Therefore, it is urgent to develop 'strengthened safety net' policies that closely identify welfare gaps created by minimum wage hikes and enable these individuals to be reincorporated into the welfare system. Specifically, measures are needed for temporary support, such as emergency welfare services or enhanced support for the near-poor, for households excluded from welfare due to sudden income increases when they face crises.

Improvement Measures for Welfare Systems Linked to Minimum Wage Increases

To mitigate drastic changes in welfare systems due to minimum wage hikes, measures could include deferring the impact of minimum wage changes in recognized income calculations for a certain period or adjusting the labor income deduction rate. Additionally, a 'gradual exit from welfare' system should be introduced, where earned income increases minimize benefit reductions up to a certain level, allowing recipients to stably enjoy the positive effects of income growth. For example, only a certain percentage of the income increase could be reflected in recognized income, or the rate of benefit reduction could be limited for specific income brackets. Furthermore, it is crucial to regularly simulate the impact of welfare systems linked to minimum wage increases and activate social discussions for policy adjustments. This implies that such institutional considerations should be discussed alongside the 2026 minimum wage determination.