WASHINGTON DC, Jan 27 (IPS) – Korea’s population is aging faster than almost any other country. That’s because people live longer than in most other countries, while the birth rate is one of the lowest in the world.
About a fifth of the population is 65 years or older, more than three times as many as in the 1990s. This is important because older people tend to consume less, which can have far-reaching economic consequences, especially as the pace of aging accelerates and birth rates do not improve, which could ultimately lead to population decline.
We estimate that every 1 percent decline in Korea’s population will reduce real consumption by 1.6 percent.
Korea has ample room to meet its current spending needs and respond to unforeseen shocks, with public debt below 50 percent of gross domestic product. However, age-related pressures on government spending are likely to increase significantly in the coming years. That would significantly reduce fiscal space unless policymakers implement reforms.
We estimate spending on pensions, health care and long-term care will increase by 30 to 35 percent of GDP by 2050, depending on alternative estimates for long-term spending by various institutions. However, under our baseline scenario – which includes lower potential economic growth due to aging and no measures to offset this – the debt ratio could reach 90 to 130 percent in 2050, depending on the expenditure estimate used, increasing risks to long-term debt sustainability.
Structural reforms that maintain potential growth – such as those of AI adoption, greater labor force participation, and more efficient resource allocation – would create more fiscal space for Korea to support the elderly.
But given the high risks and uncertainty surrounding the growth impact of the reforms, even with these reforms, public debt could still exceed 100 percent of GDP.
In addition to structural reforms, we also recommend budgetary reforms to help create more room in the budget to accommodate higher expenditures without putting pressure on public finances.
Greater efficiency
Generating additional income will be especially useful. In addition to recent changes, such as reversing some corporate tax cuts, policymakers could reconsider existing personal and corporate tax exemptions and simplify them where necessary.
Reviewing and adjusting certain value-added tax exemptions, which have been increased, could also help. Similarly, reducing inefficient spending, including streamlining support to local governments and small and medium-sized enterprises, could help create space.
In the long run, making government spending more efficient will help increase the productive capacity of the economy.
To reduce long-term spending pressures, advancing pension reforms remains important. Parliament recently strengthened the finances of the National Pension Service, increasing contributions to defer future losses. Additional reforms should aim to keep the system sustainable while ensuring fair and adequate benefits.
Finally, adopting a clear and credible quantitative budget limit to guide policies to achieve budgetary objectives, supported by a stronger medium-term fiscal framework, would help keep public finances stable in the long term, while allowing fiscal policy to respond to shocks when necessary.
Moreover, the medium-term framework could predict and integrate expected expenditure on aging, making fiscal policy more predictable and transparent. This could be strengthened by longer-term strategies that take into account future spending pressures and propose options to finance them.
Rahul Anand is an assistant director in the Asia Pacific department, where Selim walks is a senior economist.
IPS UN Office
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