The Graying of Korea
The Graying of Korea demographics and retirement policy in the Land of the Morning Calm presentation by
Neil Howe and Richard Jackson Global Aging Initiative Center for Strategic and International Studies Seoul, Republic of Korea March 22, 2007
Korea today is still a demographically youthful thf l nation. ti Korea, K however, h is i about b t to be overtaken by an age wave of stunning gp proportions. p A half century ago in 1960, there were 18 Koreans under age g 20 for every y one Korean aged 65 or older. A half century from now in 2050, there will be three Korean elders for every one Korean child. child
A young Korea is about to grow old.
8.0%
NPS E Expenditures dit as a Percent P t off GDP, GDP Current-Law Projection, 2005-2050
7.3%
7.0%
Percent of G GDP
6.0%
6.3% NPS Expenditures as a Percent of Workers' Taxable Payroll
5.0%
2005 2010 2020 2030 2040 2050
4.0% 3.0%
5.2%
1.7% 3 2% 3.2% 5.7% 11.4% 21.5% 30.0%
4 1% 4.1% 3.1% 2 2% 2.2%
2.0%
1.5% 1.0%
1.0%
0 4% 0.4%
0.6%
0.0% 2005
2010
Source: Moon (2006)
2015
2020
2025
2030
2035
2040
2045
2050
Behind Korea's age wave: A dramatic decline in y fertility.
Korean Total Fertility Rate, 1960-2006
7.0
Total Fertility R T Rate
60 6.0
Korean T K Total t l Fertility Rate
5.0
1960 1970 1980 1990 2000 2006
4.0 3.0
6.0 4.5 28 2.8 1.6 1.5 1.1
2.0 1.0 0.0
1960
1965
Source: KNSO (2006)
1970
1975
1980
1985
1990
1995
2000
2005
Behind Korea's age wave: An equally dramatic rise in life expectancy. p y
80
79
Korean Life Expectancy at Birth, 1955-2005 76 71 68
70 Life Expectan ncy
74
62
64
66
59
60
Life Expectancy p y at Birth in 2005
52
US UK Germany Korea France Italy Japan
50 50
40
77.7 78.4 78.6 78.6 79.6 79.7 81.2
30
1955
1960
1966
1970
1975
1980
Source: KNSO (2006) (2006), Kwon (2003) (2003), and U U.S. S Census Bureau (2006)
1985
1990
1995
2000
2005
The inversion of the age pyramid.
Throughout history, the age structure of Korea’s population has resembled a pyramid, with many young people at 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. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
1960
70-74 60-64
median age
19.0 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA WAS in 1960
Pyramid inversion of Korea—1960 to 2050. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
2005
70-74 60-64
median age
34.8 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA IS TODAY
Pyramid inversion of Korea—1960 to 2050. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
2050
70-74 60-64
median age
56.7 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA WILL BE IN 2050
The rapid aging of Korea’s Korea s population will be accompanied by rapid workforce and population decline.
By 2050, there will be one one--third fewer workingworkingage g Koreans than there are today. y
Cumulative Percentage Change in Korea's Working-Age Population (Aged 20-64), by Time Period
10% 5.3%
Pe ercentage Cha ange
0%
10% -10%
-20%
-30%
Percentage Change C in Korea's Working-Age Population by Age Group, 2005-50
Age 20 20-29 29 Age 30-39 Age 40-49 Age 50-59 Age 60-64
-6.6% 6.6%
53 9% -53.9% -55.8% -46.1% +21.9% +51.3%
-21.2%
-33.5% -40% 2005-20 Source: KNSO (2006)
2005-30
2005-40
2005-50
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support” ratio of workers to retirees. i
By 2050, there will be barely one workingworking-age pp each elder. adult available to support
18.0 16.0
Aged Support Ratio of Working-Age Koreans (Aged 20-64) to Elderly Koreans (Aged 65 & Over), 1960-2050 Aged Support Ratio
2005 US UK France Germany Korea Italy Japan
12.0 10.0 8.0
4.8 3.7 35 3.5 3.3 7.2 3.1 3.1
2050 2.8 2.3 1 1.9 9 1.7 1.3 1.2 1.2
60 6.0 4.0 20 2.0 0.0 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 05 20 10 20 15 20 20 20 25 20 30 20 35 20 40 20 45 20 50
Aged Supportt Ratio A
14.0
Source: KNSO (2006) and UN (2005)
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support support” ” ratio of workers to retirees. i
Traditional family support networks are under increasing pressure from “modernization.”
The share of elders living with their children has p y over the p past 25 y years. fallen steeply
Percent of Korean Elderly (Aged 65 & Over) Living with their Children, 1980-2004
90%
81% 80%
75% 68%
Percent of the Elde erly
70%
57%
60%
49%
50%
44% Living Arrangements of Korean Elderly y in 2004
40% 30% 20%
Living with Children Living with Spouse Only Living Alone Other Arrangements
44% 27% 25% 5%
10% 0%
1980
1985
Source: Chung (2005) and KNSO (2004)
1990
1995
2000
2004
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support support” ” ratio of workers to retirees.
Traditional family support networks are under increasing pressure from “modernization. modernization.” ”
A growing share of the burden of supporting tomorrow’s elderly will show up in public budgets— budgets— and taxpayer contributions.
Without reform, the cost of Korea’s National y (NPS) ( ) will rise explosively. p y Pension System
8.0%
NPS Expenditures as a Percent of GDP, Current-Law Projection, 2005-2050
7.3%
7.0%
Percent of GD P DP
6.0%
6 3% 6.3% NPS Expenditures as a Percent of Workers' Taxable Payroll
5.0%
2005 2010 2020 2030 2040 2050
4.0% 3 0% 3.0%
5.2%
1.7% 1 7% 3.2% 5.7% 11.4% 21.5% 30 0% 30.0%
4.1% 3.1% 2.2%
2.0%
1.5% 1.0%
1.0%
0.4%
0.6%
0.0% 2005
2010
Source: Moon (2006)
2015
2020
2025
2030
2035
2040
2045
2050
Despite its unsustainable cost, the benefits that the NPS offers are inadequate. inadequate
Although the NPS is often described as a “high benefit” system, the reality is quite different. Replacement rates are actually very modest by international standards, and are bound to be cut further in the future as costs rise.
Properly measured, NPS benefits are nearly oneonethird lower than the official figures g suggest. gg
70%
NPS Replacement Rates for Average Earners with 40 Years of Contributions: Current Law versus Government Reform Proposal 60%
60% R Replacement Rate
50% 50%
42% 40%
35%
30% 20% 10% 0%
Average Salary
Final Salary
Current Law Source: NPS (2007) and CSIS calculations
Average Salary
Final Salary
G 't Reform Gov't R f Proposal P l
Despite its unsustainable cost, the benefits that the NPS offers are inadequate. inadequate
Although the NPS is often described as a “high benefit” system, the reality is quite different. Replacement rates are actually quite modest by international standards, and are bound to be cut further in the future as costs rise.
The NPS also leaves a large share of today’s workforce uncovered, which means that a large share of tomorrow’s elderly y will have no pension p at all.
Just two two--thirds of Korean workers are now gap public p pension benefit of any y kind. earning
Percent of Korean Labor Force (Aged 18-59) Covered by Public Pension Systems in 2004 100%
12.8%
Percent o of Labor Forcce
80%
Not Earning Pension
Entirely Uncovered
22.7%
60%
NPS: NonContributors
40%
NPS: Active Contributors
Earning Pension
58.1%
Special Gov't Pensions* Pensions
20%
6.4%
0%
* Public employees, private school teachers, and the armed forces.
Source: NPS (2006) and NJC (2006)
1
If the NPS covered all workers— workers—and if it paid the benefits it appears to promise— promise—its cost would be double current projections. projections
16% 14%
NPS Expenditures, as a Percent of GDP, Current-Law versus CSIS "No Benefit Gap" Projection for 2050
13.9%
Percent off GDP
12% 10%
7.3%
8% 6% 4% 2%
0.4%
0% 2005
2050 Current-Law Projection
2050 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 final salary) w ill match its nominal replacement rates.
Source: Moon (2006) and CSIS calculations
The NPS isn’t the only government program whose cost will be rising g as Korea ages. g Graying also means paying more for health care,, nursing g homes,, and other social services for the elderly.
Under a realistic scenario, total government spending on old old--age benefits could easily exceed 25 percent of GDP by 2050. 2050
30%
Korean Government Spending on Old-Age Benefit Programs, 2005 and Projections for 2050 25.5%
Percent off GDP
25% 18.9%
20%
Long-Term Care
15%
Health Care
10% 13 9% 13.9% 5%
Welfare W lf Benefits
2.6%
NPS: 0.4%
7.3%
Special Gov't P i Pensions NPS
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 final salary) l ) w ill match t h itits nominal i l replacement l t rates. t
Source: Moon (2006), Choi (2006), and CSIS calculations
To successfully meet the aging challenge, Korea will have to pursue an ambitious reform agenda on three fronts. fronts
First, reform the public retirement system so that it protects all Koreans and offers more adequate benefits at an affordable longlong-term cost.
Second, reform the private retirement system to broaden coverage and improve security.
Third, Thi d enactt broader b d social i l reforms f that th t will ill help h l maintain economic and living standard growth as Korea’’s workforce ages and shrinks. Korea
Reforming the public retirement system.
The NPS must be fundamentally restructured. Merely y raising g contributions and cutting g benefits will not ensure the system’ system’s economic sustainability— sustainability —and would worsen its adequacy.
CSIS recommends d a ttwotwo-step t reform: f Put in place a universal floor of protection against poverty in old age, either as a meansmeans-tested benefit or a universal flat benefit. Transform the current NPS by combining it with a mandatory system of fully funded “add add--on on”” personal accounts.
An overview of CSIS’ National Personal Accounts (NPA) proposal.
In the minimum plan, the government would raise the NPS contribution rate from 9 to 12.9 percent as currently y planned, p , but the extra 3.9 p percent would go to the new NPA system.
Newly earned NPS retirement benefits would be reduced to meet the limitations of a permanent 9 percent contribution rate.
The NPA accounts would be mandatory mandatory,, personally owned, owned d, and d tightly i h l regulated, regulated l d, with i h assets annuitized upon retirement.
A larger g NPA p plan would require q either larger g “add add-on” on ” contributions or larger reductions in the current NPS benefit formula.
The NPA plan would have many benefits.
The NPA plan would deliver higher benefits at a lower contribution rate.
The NPA plan would be indefinitely sustainable without new contribution hikes. The system would never go bankrupt.
The NPA plan would improve compliance, participation and trust in the system. participation, system
The NPA plan would broaden and deepen capital markets and help maintain adequate national savings in an aging Korea.
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Most Korean household wealth is in real estate and bank deposits. p
Korean Household Wealth by Type in 2001, as a Percent of Total Bank Deposits 13%
Real Estate 83%
Life Insurance 3%
Other 1% Source: Yoo (2005)
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
Only a fraction of severance pay benefits are y funded. externally
Percent of Severance Pay Assets by Type of Funding in 2004* 100%
23% 37%
Perccent of Assetts
80%
External Assets (RI and RT)
60%
40%
77% 63%
20%
0% All Firms *D Data t ffor firms fi w ith 30 or more employees l are ffor 2002 2002.
Source: Kwon (2005) and Lee (2004)
Firms with 30 or More Employees
Book Reserves
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
The new corporate pension system is a step in the right direction, but it is off to a slow start.
Participation in Korea's corporate pension y has so far been disappointing. pp g system
Percent of Eligible Firms, Eligible Employees, and Total Labor Force Participating in Corporate Pension System, End of November 2006 3.5%
3.1% 3.0%
2.7%
Percen nt of Total
2.5% 2.0% 1.5% 1.0%
0.7%
0.5% 0.0% Eligible Firms Source: MOL (2006)
Eligible Employees
Total Labor Force
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
The new corporate pension system is a step in the right direction, but it is off to a slow start.
The government should strengthen incentives for employers to convert severance pay schemes into funded pensions. p
The broader social reform agenda.
By 2050, half of all Korean adults will be over age 60. To prosper while it ages, Korea must encourage longer work lives.
Korea has both the lowest fertility rate in the OECD and one of the lowest rates of female labor labor--force participation It must reform a workplace and participation. family culture that makes it difficult for women to balance jobs and babies.
Koreans aged 80 and over will be the fastest growing segment of the population. Korea must find costcost-effective ways to help families care for the burgeoning number of frail elders.
Perceentage Changge in the Eld erly Population
The oldest elderly age brackets will be the fastest g growing g of all.
1000%
800%
600%
400%
Percentage Change in the Korean Elderly Population by Age Group, 2005-2050 Elderly (Aged 80 & Over) as a Percent of Total Elderly
2005 2020 2030 2040 2050
807%
15% 23% 22% 29% 38%
172%
200%
0% Age 65-79 Source: KNSO (2006)
Age 80 & Over
Korea still has time to prepare for the impending age wave. Its population is still young and growing— growing— and its public retirement system is still immature, and hence unburdened by the enormous unfunded liabilities that raise the economic and political costs of reform in most developed countries. Korea must act decisively before the window of opportunity closes.
Neil Howe and Richard Jackson Global Aging Initiative Center for Strategic and International Studies Seoul, Republic of Korea March 22, 2007
Korea today is still a demographically youthful thf l nation. ti Korea, K however, h is i about b t to be overtaken by an age wave of stunning gp proportions. p A half century ago in 1960, there were 18 Koreans under age g 20 for every y one Korean aged 65 or older. A half century from now in 2050, there will be three Korean elders for every one Korean child. child
A young Korea is about to grow old.
8.0%
NPS E Expenditures dit as a Percent P t off GDP, GDP Current-Law Projection, 2005-2050
7.3%
7.0%
Percent of G GDP
6.0%
6.3% NPS Expenditures as a Percent of Workers' Taxable Payroll
5.0%
2005 2010 2020 2030 2040 2050
4.0% 3.0%
5.2%
1.7% 3 2% 3.2% 5.7% 11.4% 21.5% 30.0%
4 1% 4.1% 3.1% 2 2% 2.2%
2.0%
1.5% 1.0%
1.0%
0 4% 0.4%
0.6%
0.0% 2005
2010
Source: Moon (2006)
2015
2020
2025
2030
2035
2040
2045
2050
Behind Korea's age wave: A dramatic decline in y fertility.
Korean Total Fertility Rate, 1960-2006
7.0
Total Fertility R T Rate
60 6.0
Korean T K Total t l Fertility Rate
5.0
1960 1970 1980 1990 2000 2006
4.0 3.0
6.0 4.5 28 2.8 1.6 1.5 1.1
2.0 1.0 0.0
1960
1965
Source: KNSO (2006)
1970
1975
1980
1985
1990
1995
2000
2005
Behind Korea's age wave: An equally dramatic rise in life expectancy. p y
80
79
Korean Life Expectancy at Birth, 1955-2005 76 71 68
70 Life Expectan ncy
74
62
64
66
59
60
Life Expectancy p y at Birth in 2005
52
US UK Germany Korea France Italy Japan
50 50
40
77.7 78.4 78.6 78.6 79.6 79.7 81.2
30
1955
1960
1966
1970
1975
1980
Source: KNSO (2006) (2006), Kwon (2003) (2003), and U U.S. S Census Bureau (2006)
1985
1990
1995
2000
2005
The inversion of the age pyramid.
Throughout history, the age structure of Korea’s population has resembled a pyramid, with many young people at 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. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
1960
70-74 60-64
median age
19.0 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA WAS in 1960
Pyramid inversion of Korea—1960 to 2050. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
2005
70-74 60-64
median age
34.8 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA IS TODAY
Pyramid inversion of Korea—1960 to 2050. KNSO Baseline Scenario Men
Women
90 94 90-94
year
80-84
2050
70-74 60-64
median age
56.7 50-54 40-44 30-34 20-24 10-14 0-4 3000
2000
1000
0
Population in Thousands
1000
2000
3000
THIS IS WHERE KOREA WILL BE IN 2050
The rapid aging of Korea’s Korea s population will be accompanied by rapid workforce and population decline.
By 2050, there will be one one--third fewer workingworkingage g Koreans than there are today. y
Cumulative Percentage Change in Korea's Working-Age Population (Aged 20-64), by Time Period
10% 5.3%
Pe ercentage Cha ange
0%
10% -10%
-20%
-30%
Percentage Change C in Korea's Working-Age Population by Age Group, 2005-50
Age 20 20-29 29 Age 30-39 Age 40-49 Age 50-59 Age 60-64
-6.6% 6.6%
53 9% -53.9% -55.8% -46.1% +21.9% +51.3%
-21.2%
-33.5% -40% 2005-20 Source: KNSO (2006)
2005-30
2005-40
2005-50
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support” ratio of workers to retirees. i
By 2050, there will be barely one workingworking-age pp each elder. adult available to support
18.0 16.0
Aged Support Ratio of Working-Age Koreans (Aged 20-64) to Elderly Koreans (Aged 65 & Over), 1960-2050 Aged Support Ratio
2005 US UK France Germany Korea Italy Japan
12.0 10.0 8.0
4.8 3.7 35 3.5 3.3 7.2 3.1 3.1
2050 2.8 2.3 1 1.9 9 1.7 1.3 1.2 1.2
60 6.0 4.0 20 2.0 0.0 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 05 20 10 20 15 20 20 20 25 20 30 20 35 20 40 20 45 20 50
Aged Supportt Ratio A
14.0
Source: KNSO (2006) and UN (2005)
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support support” ” ratio of workers to retirees. i
Traditional family support networks are under increasing pressure from “modernization.”
The share of elders living with their children has p y over the p past 25 y years. fallen steeply
Percent of Korean Elderly (Aged 65 & Over) Living with their Children, 1980-2004
90%
81% 80%
75% 68%
Percent of the Elde erly
70%
57%
60%
49%
50%
44% Living Arrangements of Korean Elderly y in 2004
40% 30% 20%
Living with Children Living with Spouse Only Living Alone Other Arrangements
44% 27% 25% 5%
10% 0%
1980
1985
Source: Chung (2005) and KNSO (2004)
1990
1995
2000
2004
The coming age wave will challenge Korea's ability y to support pp the old without imposing p ga crushing burden on the young.
Falling fertility and rising longevity translate directly into a falling “support support” ” ratio of workers to retirees.
Traditional family support networks are under increasing pressure from “modernization. modernization.” ”
A growing share of the burden of supporting tomorrow’s elderly will show up in public budgets— budgets— and taxpayer contributions.
Without reform, the cost of Korea’s National y (NPS) ( ) will rise explosively. p y Pension System
8.0%
NPS Expenditures as a Percent of GDP, Current-Law Projection, 2005-2050
7.3%
7.0%
Percent of GD P DP
6.0%
6 3% 6.3% NPS Expenditures as a Percent of Workers' Taxable Payroll
5.0%
2005 2010 2020 2030 2040 2050
4.0% 3 0% 3.0%
5.2%
1.7% 1 7% 3.2% 5.7% 11.4% 21.5% 30 0% 30.0%
4.1% 3.1% 2.2%
2.0%
1.5% 1.0%
1.0%
0.4%
0.6%
0.0% 2005
2010
Source: Moon (2006)
2015
2020
2025
2030
2035
2040
2045
2050
Despite its unsustainable cost, the benefits that the NPS offers are inadequate. inadequate
Although the NPS is often described as a “high benefit” system, the reality is quite different. Replacement rates are actually very modest by international standards, and are bound to be cut further in the future as costs rise.
Properly measured, NPS benefits are nearly oneonethird lower than the official figures g suggest. gg
70%
NPS Replacement Rates for Average Earners with 40 Years of Contributions: Current Law versus Government Reform Proposal 60%
60% R Replacement Rate
50% 50%
42% 40%
35%
30% 20% 10% 0%
Average Salary
Final Salary
Current Law Source: NPS (2007) and CSIS calculations
Average Salary
Final Salary
G 't Reform Gov't R f Proposal P l
Despite its unsustainable cost, the benefits that the NPS offers are inadequate. inadequate
Although the NPS is often described as a “high benefit” system, the reality is quite different. Replacement rates are actually quite modest by international standards, and are bound to be cut further in the future as costs rise.
The NPS also leaves a large share of today’s workforce uncovered, which means that a large share of tomorrow’s elderly y will have no pension p at all.
Just two two--thirds of Korean workers are now gap public p pension benefit of any y kind. earning
Percent of Korean Labor Force (Aged 18-59) Covered by Public Pension Systems in 2004 100%
12.8%
Percent o of Labor Forcce
80%
Not Earning Pension
Entirely Uncovered
22.7%
60%
NPS: NonContributors
40%
NPS: Active Contributors
Earning Pension
58.1%
Special Gov't Pensions* Pensions
20%
6.4%
0%
* Public employees, private school teachers, and the armed forces.
Source: NPS (2006) and NJC (2006)
1
If the NPS covered all workers— workers—and if it paid the benefits it appears to promise— promise—its cost would be double current projections. projections
16% 14%
NPS Expenditures, as a Percent of GDP, Current-Law versus CSIS "No Benefit Gap" Projection for 2050
13.9%
Percent off GDP
12% 10%
7.3%
8% 6% 4% 2%
0.4%
0% 2005
2050 Current-Law Projection
2050 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 final salary) w ill match its nominal replacement rates.
Source: Moon (2006) and CSIS calculations
The NPS isn’t the only government program whose cost will be rising g as Korea ages. g Graying also means paying more for health care,, nursing g homes,, and other social services for the elderly.
Under a realistic scenario, total government spending on old old--age benefits could easily exceed 25 percent of GDP by 2050. 2050
30%
Korean Government Spending on Old-Age Benefit Programs, 2005 and Projections for 2050 25.5%
Percent off GDP
25% 18.9%
20%
Long-Term Care
15%
Health Care
10% 13 9% 13.9% 5%
Welfare W lf Benefits
2.6%
NPS: 0.4%
7.3%
Special Gov't P i Pensions NPS
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 final salary) l ) w ill match t h itits nominal i l replacement l t rates. t
Source: Moon (2006), Choi (2006), and CSIS calculations
To successfully meet the aging challenge, Korea will have to pursue an ambitious reform agenda on three fronts. fronts
First, reform the public retirement system so that it protects all Koreans and offers more adequate benefits at an affordable longlong-term cost.
Second, reform the private retirement system to broaden coverage and improve security.
Third, Thi d enactt broader b d social i l reforms f that th t will ill help h l maintain economic and living standard growth as Korea’’s workforce ages and shrinks. Korea
Reforming the public retirement system.
The NPS must be fundamentally restructured. Merely y raising g contributions and cutting g benefits will not ensure the system’ system’s economic sustainability— sustainability —and would worsen its adequacy.
CSIS recommends d a ttwotwo-step t reform: f Put in place a universal floor of protection against poverty in old age, either as a meansmeans-tested benefit or a universal flat benefit. Transform the current NPS by combining it with a mandatory system of fully funded “add add--on on”” personal accounts.
An overview of CSIS’ National Personal Accounts (NPA) proposal.
In the minimum plan, the government would raise the NPS contribution rate from 9 to 12.9 percent as currently y planned, p , but the extra 3.9 p percent would go to the new NPA system.
Newly earned NPS retirement benefits would be reduced to meet the limitations of a permanent 9 percent contribution rate.
The NPA accounts would be mandatory mandatory,, personally owned, owned d, and d tightly i h l regulated, regulated l d, with i h assets annuitized upon retirement.
A larger g NPA p plan would require q either larger g “add add-on” on ” contributions or larger reductions in the current NPS benefit formula.
The NPA plan would have many benefits.
The NPA plan would deliver higher benefits at a lower contribution rate.
The NPA plan would be indefinitely sustainable without new contribution hikes. The system would never go bankrupt.
The NPA plan would improve compliance, participation and trust in the system. participation, system
The NPA plan would broaden and deepen capital markets and help maintain adequate national savings in an aging Korea.
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Most Korean household wealth is in real estate and bank deposits. p
Korean Household Wealth by Type in 2001, as a Percent of Total Bank Deposits 13%
Real Estate 83%
Life Insurance 3%
Other 1% Source: Yoo (2005)
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
Only a fraction of severance pay benefits are y funded. externally
Percent of Severance Pay Assets by Type of Funding in 2004* 100%
23% 37%
Perccent of Assetts
80%
External Assets (RI and RT)
60%
40%
77% 63%
20%
0% All Firms *D Data t ffor firms fi w ith 30 or more employees l are ffor 2002 2002.
Source: Kwon (2005) and Lee (2004)
Firms with 30 or More Employees
Book Reserves
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
The new corporate pension system is a step in the right direction, but it is off to a slow start.
Participation in Korea's corporate pension y has so far been disappointing. pp g system
Percent of Eligible Firms, Eligible Employees, and Total Labor Force Participating in Corporate Pension System, End of November 2006 3.5%
3.1% 3.0%
2.7%
Percen nt of Total
2.5% 2.0% 1.5% 1.0%
0.7%
0.5% 0.0% Eligible Firms Source: MOL (2006)
Eligible Employees
Total Labor Force
Reforming the private retirement system.
Koreans save relatively little for retirement on their own.
Korea’s traditional employer severance pay system Korea’ covers less than a third of the workforce— workforce—and its benefits are largely unfunded.
The new corporate pension system is a step in the right direction, but it is off to a slow start.
The government should strengthen incentives for employers to convert severance pay schemes into funded pensions. p
The broader social reform agenda.
By 2050, half of all Korean adults will be over age 60. To prosper while it ages, Korea must encourage longer work lives.
Korea has both the lowest fertility rate in the OECD and one of the lowest rates of female labor labor--force participation It must reform a workplace and participation. family culture that makes it difficult for women to balance jobs and babies.
Koreans aged 80 and over will be the fastest growing segment of the population. Korea must find costcost-effective ways to help families care for the burgeoning number of frail elders.
Perceentage Changge in the Eld erly Population
The oldest elderly age brackets will be the fastest g growing g of all.
1000%
800%
600%
400%
Percentage Change in the Korean Elderly Population by Age Group, 2005-2050 Elderly (Aged 80 & Over) as a Percent of Total Elderly
2005 2020 2030 2040 2050
807%
15% 23% 22% 29% 38%
172%
200%
0% Age 65-79 Source: KNSO (2006)
Age 80 & Over
Korea still has time to prepare for the impending age wave. Its population is still young and growing— growing— and its public retirement system is still immature, and hence unburdened by the enormous unfunded liabilities that raise the economic and political costs of reform in most developed countries. Korea must act decisively before the window of opportunity closes.
