the graying of korea - center for strategic and international studies

The Graying of KoreaThe Graying of KoreaThe Graying of KoreaThe Graying of Koreademographics and retirement policydemographics and retirement policy

in the Land of the Morning Calm in the Land of the Morning Calm

presentation by

Neil Howe and Richard JacksonNeil Howe and Richard Jackson

Global Aging InitiativeCenter for Strategic and International Studies

Seoul, Republic of KoreaMarch 22, 2007

Korea today is still a demographically Korea today is still a demographically thf l ti K h i b t thf l ti K h i b t youthful nation. Korea, however, is about youthful nation. Korea, however, is about

to be overtaken by an age wave of to be overtaken by an age wave of stunning proportions.stunning proportions.g p pg p p

A half century ago in 1960, there were 18 A half century ago in 1960, there were 18 Koreans under age 20 for every one Korean Koreans under age 20 for every one Korean g yg yaged 65 or older. A half century from now aged 65 or older. A half century from now in 2050, there will be three Korean elders in 2050, there will be three Korean elders for every one Korean childfor every one Korean childfor every one Korean child.for every one Korean child.

A young Korea is about to grow old.A young Korea is about to grow old.

NPS E dit P t f GDP

6.3%

7.3%

7.0%

8.0% NPS Expenditures as a Percent of GDP, Current-Law Projection, 2005-2050

NPS Expenditures as a

4 1%

5.2%5.0%

6.0%

GD

P

20052010

NPS Expenditures as a Percent of Workers'

Taxable Payroll

1.7%3 2%

2 2%

3.1%

4.1%

3.0%

4.0%

Per

cent

of G 2010

2020203020402050

3.2%5.7%

11.4%21.5%30.0%

0 4% 0.6%1.0%

1.5%

2.2%

1.0%

2.0%

0.4% 0.6%

0.0%2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Source: Moon (2006)

Behind Korea's age wave: A dramatic decline in Behind Korea's age wave: A dramatic decline in fertility.fertility.yy

6 0

7.0

K T t l

Korean Total Fertility Rate, 1960-2006

5.0

6.0

Rat

e

196019701980

Korean Total Fertility Rate

6.04.52 8

3.0

4.0

Tota

l Fer

tility

R 1980199020002006

2.81.61.51.1

1.0

2.0

T

0.01960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: KNSO (2006)

Behind Korea's age wave: An equally dramatic Behind Korea's age wave: An equally dramatic rise in life expectancy.rise in life expectancy.p yp y

7476

79

71

80 Korean Life Expectancy at Birth, 1955-2005

5962

6466

6871

60

70

ncy

Life Expectancy at

5052

50

60

Life

Exp

ecta

n

USUKGermany

p yBirth in 2005

77.778.478.6

40

KoreaFranceItalyJapan

78.679.679.781.2

301955 1960 1966 1970 1975 1980 1985 1990 1995 2000 2005

Source: KNSO (2006) Kwon (2003) and U S Census Bureau (2006)Source: KNSO (2006), Kwon (2003), and U.S. Census Bureau (2006)

The inversion of the age pyramid.The inversion of the age pyramid.

Throughout history, the age structure of Korea’s population has resembled a Korea’s population has resembled a pyramid, with many young people at

the base and a few old people at the the base and a few old people at the top.

Falling fertility and rising longevity are about to turn the traditional population pyramid on its head.

Pyramid inversion of Korea—1960 to 2050.

Men Women

KNSO Baseline Scenario

year90 94 year

196080-84

90-94

median age

19.060-64

70-74

THIS IS40-44

50-54

WHERE KOREA WAS

in 196020-24

30-34

0-4

10-14

Population in Thousands

3000 2000 1000 0 1000 2000 3000


Men Women


year90 94 year

200580-84

90-94

median age

34.860-64

70-74

THIS IS40-44

50-54

WHERE KOREA IS

TODAY20-24

30-34

0-4

10-14


3000 2000 1000 0 1000 2000 3000


Men Women


year90 94 year

205080-84

90-94

median age

56.760-64

70-74

THIS IS40-44

50-54

WHERE KOREA WILL BE IN 205020-24

30-34

0-4

10-14


3000 2000 1000 0 1000 2000 3000

The rapid aging of Korea’s population will The rapid aging of Korea’s population will The rapid aging of Korea s population will The rapid aging of Korea s population will be accompanied by rapid workforce and be accompanied by rapid workforce and population decline.population decline.

By 2050, there will be oneBy 2050, there will be one--third fewer workingthird fewer working--age Koreans than there are today.age Koreans than there are today.g yg y

5.3%10% Cumulative Percentage Change in Korea's Working-Age

Population (Aged 20-64), by Time Period

-6.6%10%

0%

ange

C 6.6%

-20%

-10%

erce

ntag

e C

ha

Age 20 29

Percentage Change in Korea's Working-Age

Population by Age Group, 2005-50

53 9%-21.2%

-30%

Pe Age 20-29

Age 30-39Age 40-49Age 50-59Age 60-64

-53.9%-55.8%-46.1%+21.9%+51.3%

-33.5%

-40%2005-20 2005-30 2005-40 2005-50

Source: KNSO (2006)

The coming age wave will challenge Korea's The coming age wave will challenge Korea's ability to support the old without imposing a ability to support the old without imposing a y pp p gy pp p gcrushing burden on the young.crushing burden on the young.

Falling fertility and rising longevity translate Falling fertility and rising longevity translate directly into a falling “support” ratio of workers to directly into a falling “support” ratio of workers to

iiretirees. retirees.

By 2050, there will be barely one workingBy 2050, there will be barely one working--age age adult available to support each elder. adult available to support each elder. pppp

16.0

18.0 Aged Support Ratio of Working-Age Koreans (Aged 20-64) to Elderly Koreans (Aged 65 & Over), 1960-2050

Aged Support Ratio

12.0

14.0

t Rat

io

USUKFrance

2005 2050 4.8 2.8 3.7 2.3

3 5 1 9

6 0

8.0

10.0

Age

d S

uppo

rt FranceGermanyKoreaItalyJapan

3.5 1.9 3.3 1.7 7.2 1.3 3.1 1.2 3.1 1.2

2 0

4.0

6.0A

0.0

2.0

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20

Source: KNSO (2006) and UN (2005)


Falling fertility and rising longevity translate Falling fertility and rising longevity translate directly into a falling directly into a falling ““supportsupport”” ratio of workers to ratio of workers to

iiretirees. retirees.

Traditional family support networks are under Traditional family support networks are under increasing pressure from “modernization.”increasing pressure from “modernization.”

The share of elders living with their children has The share of elders living with their children has fallen steeply over the past 25 years.fallen steeply over the past 25 years.p y p yp y p y

81%80%

90%

Percent of Korean Elderly (Aged 65 & Over) Living with their Children, 1980-2004

75%68%

57%60%

70%

80%

erly

49%44%

40%

50%

60%

nt o

f the

Eld

e

Living Arrangements of Korean Elderly in 2004

20%

30%Per

ce Living with ChildrenLiving with Spouse OnlyLiving AloneOther Arrangements

y

44%27%25%

5%

0%

10%

1980 1985 1990 1995 2000 20041980 1985 1990 1995 2000 2004

Source: Chung (2005) and KNSO (2004)


Falling fertility and rising longevity translate Falling fertility and rising longevity translate directly into a falling directly into a falling ““supportsupport”” ratio of workers to ratio of workers to retirees. retirees.

Traditional family support networks are under Traditional family support networks are under increasing pressure from increasing pressure from ““modernization.modernization.””

A growing share of the burden of supporting A growing share of the burden of supporting tomorrow’s elderly will show up in public budgetstomorrow’s elderly will show up in public budgets——and taxpayer contributions.and taxpayer contributions.and taxpayer contributions.and taxpayer contributions.

Without reform, the cost of Korea’s National Without reform, the cost of Korea’s National Pension System (NPS) will rise explosively.Pension System (NPS) will rise explosively.y ( ) p yy ( ) p y

6 3%

7.3%

7.0%

8.0% NPS Expenditures as a Percent of GDP, Current-Law Projection, 2005-2050

5.2%

6.3%

5.0%

6.0%

DP

2005

NPS Expenditures as a Percent of Workers'

Taxable Payroll

1 7%

3.1%

4.1%

3 0%

4.0%

5.0%

Per

cent

of G

D 200520102020203020402050

1.7%3.2%5.7%

11.4%21.5%30 0%

1.0%1.5%

2.2%2.0%

3.0%P 2050 30.0%

0.4% 0.6%

0.0%

1.0%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Source: Moon (2006)

Despite its unsustainable cost, the benefits that Despite its unsustainable cost, the benefits that the NPS offers are inadequate the NPS offers are inadequate the NPS offers are inadequate. the NPS offers are inadequate.

Although the NPS is often described as a “high Although the NPS is often described as a “high benefit” system, the reality is quite different. benefit” system, the reality is quite different. Replacement rates are actually very modest by Replacement rates are actually very modest by Replacement rates are actually very modest by Replacement rates are actually very modest by international standards, and are bound to be cut international standards, and are bound to be cut further in the future as costs rise.further in the future as costs rise.

Properly measured, NPS benefits are nearly oneProperly measured, NPS benefits are nearly one--third lower than the official figures suggest.third lower than the official figures suggest.g ggg gg

60%60%

70%NPS Replacement Rates for Average Earners with 40 Years of Contributions: Current Law versus Government Reform Proposal

42%

50%50%

60%

Rat

e

35%

30%

40%

Rep

lace

men

t

10%

20%R

0%Average Salary Final Salary Average Salary Final Salary

Current Law G 't R f P l

Source: NPS (2007) and CSIS calculations

Current Law Gov't Reform Proposal

Despite its unsustainable cost, the benefits that Despite its unsustainable cost, the benefits that the NPS offers are inadequate the NPS offers are inadequate the NPS offers are inadequate. the NPS offers are inadequate.

Although the NPS is often described as a “high Although the NPS is often described as a “high benefit” system, the reality is quite different. benefit” system, the reality is quite different. Replacement rates are actually quite modest by Replacement rates are actually quite modest by Replacement rates are actually quite modest by Replacement rates are actually quite modest by international standards, and are bound to be cut international standards, and are bound to be cut further in the future as costs rise.further in the future as costs rise.

The NPS also leaves a large share of today’s The NPS also leaves a large share of today’s workforce uncovered, which means that a large workforce uncovered, which means that a large share of tomorrow’s elderly will have no pension at share of tomorrow’s elderly will have no pension at y py pall. all.

Just twoJust two--thirds of Korean workers are now thirds of Korean workers are now earning a public pension benefit of any kind.earning a public pension benefit of any kind.g p p yg p p y

100%

Percent of Korean Labor Force (Aged 18-59) Covered by Public Pension Systems in 2004

22.7%

12.8%

80%

100%

ce

EntirelyUncoveredNot Earning Pension

60%

of L

abor

For

c

NPS: Non-Contributors

NPS: Active

58.1%

20%

40%

Per

cent

o NPS: ActiveContributors

Special Gov'tPensions*

Earning Pension

6.4%0%1

Pensions

* Public employees, private school teachers, and the armed forces.

Source: NPS (2006) and NJC (2006)

If the NPS covered all workersIf the NPS covered all workers——and if it paid the and if it paid the benefits it appears to promisebenefits it appears to promise——its cost would be its cost would be double current projectionsdouble current projectionsdouble current projections.double current projections.

13.9%14%

16% NPS Expenditures, as a Percent of GDP, Current-Law versus CSIS "No Benefit Gap" Projection for 2050

10%

12%

f GD

P

7.3%

6%

8%

Per

cent

of

0.4%0%

2%

4%

0%2005 2050 2050

Current-Law Projection CSIS "No Benefit Gap" Projection*

*Assumes that the active contribution rate among NPS covered w orkers rises to 90% and that the system’s actual replacement rates (initial benefits as a % of f inal salary) w ill match its nominal replacement rates.

Source: Moon (2006) and CSIS calculations

The NPS isn’t the only government program The NPS isn’t the only government program whose cost will be rising as Korea ages. whose cost will be rising as Korea ages. g gg g

Graying also means paying more for health Graying also means paying more for health care, nursing homes, and other social care, nursing homes, and other social , g ,, g ,services for the elderly.services for the elderly.

Under a realistic scenario, total government Under a realistic scenario, total government spending on oldspending on old--age benefits could easily exceed age benefits could easily exceed 25 percent of GDP by 2050 25 percent of GDP by 2050 25 percent of GDP by 2050. 25 percent of GDP by 2050.

30%

W lf

Korean Government Spending on Old-Age Benefit Programs, 2005 and Projections for 2050

25.5%

20%

25%

f GD

P

WelfareBenefits

Long-TermCare

18.9%

25.5%

13 9%10%

15%

Per

cent

of

Health Care

Special Gov'tP i

7.3%

13.9%

0%

5%

2005 2050 2050

Pensions

NPS2.6% NPS: 0.4%

2005 2050 2050

*Assumes that the active contribution rate among NPS covered w orkers rises to 90% and that the system’s actual replacement rates (initial benefits as a % of f inal l ) ill t h it i l l t t

Current-Law Projection CSIS "No Benefit Gap" Projection*

salary) w ill match its nominal replacement rates.

Source: Moon (2006), Choi (2006), and CSIS calculations

To successfully meet the aging challenge, Korea To successfully meet the aging challenge, Korea will have to pursue an ambitious reform agenda will have to pursue an ambitious reform agenda on three frontson three frontson three fronts.on three fronts.

First, reform the public retirement system so that it First, reform the public retirement system so that it First, reform the public retirement system so that it First, reform the public retirement system so that it protects all Koreans and offers more adequate protects all Koreans and offers more adequate benefits at an affordable longbenefits at an affordable long--term cost. term cost.

Second, reform the private retirement system to Second, reform the private retirement system to broaden coverage and improve security.broaden coverage and improve security.

Thi d t b d i l f th t ill h l Thi d t b d i l f th t ill h l Third, enact broader social reforms that will help Third, enact broader social reforms that will help maintain economic and living standard growth as maintain economic and living standard growth as KoreaKorea’’s workforce ages and shrinks.s workforce ages and shrinks.

Reforming the public retirement system.Reforming the public retirement system.

The NPS must be fundamentally restructured. The NPS must be fundamentally restructured. Merely raising contributions and cutting benefits Merely raising contributions and cutting benefits y g gy g gwill not ensure the systemwill not ensure the system’’s economic s economic sustainabilitysustainability——and would worsen its adequacy.and would worsen its adequacy.

CSIS d tCSIS d t t f t f CSIS recommends a twoCSIS recommends a two--step reform: step reform:

Put in place a universal floor of protection against Put in place a universal floor of protection against poverty in old age, either as a meanspoverty in old age, either as a means--tested benefit tested benefit or a universal flat benefit.or a universal flat benefit.

Transform the current NPS by combining it with a Transform the current NPS by combining it with a mandatory system of fully funded mandatory system of fully funded ““addadd--onon”” personal personal mandatory system of fully funded mandatory system of fully funded addadd onon personal personal accounts. accounts.

An overview of CSIS’ National Personal An overview of CSIS’ National Personal Accounts (NPA) proposal.Accounts (NPA) proposal.Accounts (NPA) proposal.Accounts (NPA) proposal.

In the minimum plan, the government would raise In the minimum plan, the government would raise the NPS contribution rate from 9 to 12.9 percent as the NPS contribution rate from 9 to 12.9 percent as currently planned, but the extra 3.9 percent would currently planned, but the extra 3.9 percent would y p , py p , pgo to the new NPA system.go to the new NPA system.

Newly earned NPS retirement benefits would be Newly earned NPS retirement benefits would be reduced to meet the limitations of a permanent 9 reduced to meet the limitations of a permanent 9 reduced to meet the limitations of a permanent 9 reduced to meet the limitations of a permanent 9 percent contribution rate.percent contribution rate.

The NPA accounts would be The NPA accounts would be mandatorymandatory, , personally personally dd d i h l d i h l l dl d i h i h ownedowned, and tightly, and tightly regulatedregulated, with assets , with assets

annuitized annuitized upon retirement.upon retirement.

A larger NPA plan would require either larger A larger NPA plan would require either larger ““addadd--g p q gg p q gonon”” contributions or larger reductions in the contributions or larger reductions in the current NPS benefit formula.current NPS benefit formula.

The NPA plan would have many benefits.The NPA plan would have many benefits.

The NPA plan would deliver higher benefits at a The NPA plan would deliver higher benefits at a lower contribution rate. lower contribution rate.

The NPA plan would be indefinitely sustainable The NPA plan would be indefinitely sustainable without new contribution hikes. The system would without new contribution hikes. The system would never go bankrupt.never go bankrupt.

The NPA plan would improve compliance, The NPA plan would improve compliance, participation and trust in the systemparticipation and trust in the systemparticipation, and trust in the system.participation, and trust in the system.

The NPA plan would broaden and deepen capital The NPA plan would broaden and deepen capital markets and help maintain adequate national markets and help maintain adequate national markets and help maintain adequate national markets and help maintain adequate national savings in an aging Korea. savings in an aging Korea.

Reforming the private retirement system.Reforming the private retirement system.

Koreans save relatively little for retirement on their Koreans save relatively little for retirement on their own.own.

Most Korean household wealth is in real estate Most Korean household wealth is in real estate and bank deposits.and bank deposits.pp

Korean Household Wealth by Type in 2001, as a Percent of Total

Bank Deposits13%

Real Estate83% Life Insurance

3%

Other1%

Source: Yoo (2005)



KoreaKorea’’s traditional employer severance pay system s traditional employer severance pay system covers less than a third of the workforcecovers less than a third of the workforce——and its and its benefits are largely unfunded.benefits are largely unfunded.

Only a fraction of severance pay benefits are Only a fraction of severance pay benefits are externally funded.externally funded.yy

100%

Percent of Severance Pay Assets by Type of Funding in 2004*

23%37%80%

ts

77%40%

60%

cent

of A

sset

External Assets(RI and RT)

77%63%

20%

40%

Per

c

Book Reserves

0%All Firms Firms with 30 or More Employees

* D t f f i ith 30 l f 2002* Data for f irms w ith 30 or more employees are for 2002.

Source: Kwon (2005) and Lee (2004)




The new corporate pension system is a step in the The new corporate pension system is a step in the right direction, but it is off to a slow start.right direction, but it is off to a slow start.

Participation in Korea's corporate pension Participation in Korea's corporate pension system has so far been disappointing.system has so far been disappointing.y pp gy pp g

Percent of Eligible Firms, Eligible Employees, and Total Labor Force Participating in Corporate Pension System, End of November 2006

3.1%

2.7%3.0%

3.5%

2.0%

2.5%

nt o

f Tot

al

0.7%1.0%

1.5%

Per

cen

0.0%

0.5%

Eligible Firms Eligible Employees Total Labor ForceEligible Firms Eligible Employees Total Labor Force

Source: MOL (2006)




The new corporate pension system is a step in the The new corporate pension system is a step in the right direction, but it is off to a slow start.right direction, but it is off to a slow start.

The government should strengthen incentives for The government should strengthen incentives for employers to convert severance pay schemes into employers to convert severance pay schemes into funded pensions.funded pensions.pp

The broader social reform agenda.The broader social reform agenda.

By 2050, half of all Korean adults will be over age By 2050, half of all Korean adults will be over age 60. To prosper while it ages, Korea must encourage 60. To prosper while it ages, Korea must encourage longer work lives.longer work lives.

Korea has both the lowest fertility rate in the OECD Korea has both the lowest fertility rate in the OECD and one of the lowest rates of female laborand one of the lowest rates of female labor--force force participation It must reform a workplace and participation It must reform a workplace and participation. It must reform a workplace and participation. It must reform a workplace and family culture that makes it difficult for women to family culture that makes it difficult for women to balance jobs and babies.balance jobs and babies.

Koreans aged 80 and over will be the fastest Koreans aged 80 and over will be the fastest growing segment of the population. Korea must growing segment of the population. Korea must find costfind cost--effective ways to help families care for the effective ways to help families care for the burgeoning number of frail elders.burgeoning number of frail elders.

The oldest elderly age brackets will be the The oldest elderly age brackets will be the fastest growing of all.fastest growing of all.g gg g

1000%

on

Percentage Change in the Korean Elderly Population by Age Group, 2005-2050

807%800%

erly

Pop

ulat

i

2005

Elderly (Aged 80 & Over) as a Percent of Total

Elderly

15%

400%

600%

ge in

the

Eld 2005

2020203020402050

15%23%22%29%38%

172%200%

400%

enta

ge C

hang

0%Age 65-79 Age 80 & Over

Perc

e

Source: KNSO (2006)

Korea still has time to prepare for the Korea still has time to prepare for the impending age wave. impending age wave.

Its population is still young and growingIts population is still young and growing——and its public retirement system is still and its public retirement system is still immature, and hence unburdened by the immature, and hence unburdened by the enormous unfunded liabilities that raise enormous unfunded liabilities that raise the economic and political costs of reform the economic and political costs of reform the economic and political costs of reform the economic and political costs of reform in most developed countries.in most developed countries.

Korea must act decisively before the window Korea must act decisively before the window Korea must act decisively before the window Korea must act decisively before the window of opportunity closes.of opportunity closes.

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