Challenges to achieving social cohesion

Population ageing in Korea, which is projected to be the most rapid in the OECD area, will make it even harder to tackle rapidly growing income inequality and poverty. The rising share of elderly in the population will drive up spending on health and long-term care, imposing a significant burden on the working-age population. In addition, Korea faces the potential cost of economic rapprochement with North Korea.

Rapid population ageing and its impact on public social spending

In 2010, the population aged 65 and over accounted for 11% of Korea’s population (Figure 1.8), the fifth lowest in the OECD area. However, by 2050, the share is projected to rise to 37%, the second highest among OECD countries. Meanwhile, the share of those aged 85 and over - the age group most in need of health and long-term care - is expected to rise from 1.9% to 14.5% of the Korean population. Korea will thus experience the most rapid population ageing among OECD countries over the next 40 years, reflecting two factors. First, the fertility rate plummeted from 4.5 in 1970 to below replacement at 1.6 in 1985, reflecting government policies to reduce the birth rate. At the end of the 1990s, the rate fell further to around 1.2, one of the lowest in the world, where it has remained despite government initiatives to increase the fertility rate towards the replacement level. Second, average life expectancy has increased substantially, as noted above (Figure 1.3). One option to ease the demographic burden would be immigration, although inflows have thus far been tightly restricted. Indeed, the government reported that there were 0.7 million foreign workers in Korea in 2011, accounting for less than 3% of the labour force, well below the OECD average of 10% (OECD, 2007).

Figure 1.8. International comparison of the share of the elderly (65 and over) in the total population

Source: OECD Demography and Population Database.

Rapid population ageing will put strong upward pressure on social spending. In addition to pensions, health outlays per capita for persons aged 65 and over are about four times higher in Korea than for those under that age (OECD, 2010). Population ageing will thus tend to accelerate health spending, which rose at an annual rate of more than 9% in real terms during the decade 1997-2007. Such rapid increases are not sustainable in an economy where potential growth has slowed to around 3.5% and is likely to fall below 2% by the 2030s. At such rates, health care would crowd out other government spending, including that needed to address income inequality and poverty. A recent study estimated that total public spending on long-term care in Korea, which was 0.4% of GDP in 2011, may rise to around 2% by 2050 (Kwon et al., 2011).

According to estimates by government-funded research institutes, total public social spending will reach the OECD average of around 22% of GDP by 2050, under Korea’s current framework (Figure 1.9). These studies estimate the impact of the changing population structure on social spending by central and local governments, as well as social insurance programmes. The baseline scenario by the Korea Institute for Health and Social Affairs (KIHASA) (Won et al., 2011) projects that public social spending will reach 21.6% of GDP, assuming that real GDP growth slows from an annual rate of 4.1% in the current decade to 1.2% in the 2040s. If output grows at the slower pace assumed by the Korea Institute of Public Finance (KIPF) (Park and Chun, 2009), the share of social spending would reach nearly 26% of GDP. The baseline estimate by the KIPF also exceeds 20% of GDP.

The largest increases in social spending will be related to ageing, according to the study by KIHASA. Indeed, outlays by the National Pension Scheme (NPS) are projected to rise at double-digit rate through 2050, boosting its share of GDP from 0.6% in 2011 to 4.7% in 2050 (Figure 1.10). The rapid increase reflects the maturing of the NPS, which was only introduced in 1988. Similarly, National Health Insurance and Long-term Care Insurance, which also depend significantly on ageing, are expected to increase as a share of GDP. In contrast, the Employment Insurance System and Industrial Accident Insurance are expected to remain stable as a share of GDP.

Percentage of GDP

Figure 1.9. Long-term projections of public social expenditure^

  • a) Includes public social expenditures by the government and the social insurance systems, using a population cohort approach.
  • b) Baseline estimate by Korea Institute for Health and Social Affairs (KIHASA), using the growth assumption by Korea Institute of Public Finance (KIPF).
  • c) Baseline estimate by KIHASA using their own growth assumption.
  • d) Baseline estimate by KIPF.

Source: Won, C., H. Shin, M. Yoon, M. Kim, J. Kang and K. Nam (2011), Long-term Projections of Social Expenditure (in Korean), Korea Institute of Health and Social Affairs, Seoul; and Park, H. and B. Chun (2009), An Analysis of Social Spending for Research into the Development of a Medium to Long-term Spending Estimation Model (in Korean), Korea Institute of Public Finance.

Figure 1.10. Projection of social expenditure by category

  • a) Social spending by central and local governments.
  • b) Includes pensions for civil servants, private-school teachers and the military.

Source: Won, C., H. Shin, M. Yoon, M. Kim, J. Kang and K. Nam (2011), Long-term Projections of Social Expenditure (in Korean), Korea Institute of Health and Social Affairs, Seoul.

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