Our Chief Korea and Taiwan Economist Kathleen Oh discusses
Korea's recent pension reform and its implications for the
country's rapidly aging population.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Kathleen Oh, Morgan
Stanley’s Chief Korea and Taiwan Economist. Today I’ll revisit
Korea's demographic emergency and how the recent pension reform
is trying to address it.
It's Thursday, May 1st, at 4pm in Hong Kong.
Some of you may remember that I came on the show last fall to
talk about the crisis-level demographic challenges in Korea.
Korea officially became a super-aged society at the end of 2024.
This means that more than 20 per cent of the population is 65 or
older.
In the face of its rapidly aging population and a fertility rate
that has hit rock bottom, Korea is taking decisive action
finally. The national assembly recently passed a landmark pension
reform bill to amend the National Pension Act. This measure marks
the first major change to its pension system in 18 years. And
it’s supposed to improve the pension fund's financial
sustainability to prepare for a rapidly aging population that
will only accelerate from here.
The amendments include raising pension contribution rates and
adjusting the income replacement ratio to 43 per cent. These
changes aim to delay the depletion of the fund to 2064 to 2071,
in an upside scenario. Without this reform, the fund would have
been depleted by 2055, just 30 years later.
This reform avoids having to sell the fund's financial assets by
delaying depletion. It also assures pension-holders of the
stability of future pension assets. And, last but not least, it
increases the pension fund's capacity for financial investments,
which could lead to higher returns.
This is the first step towards making legislative, and therefore
more structural changes to respond to the reality of a super-aged
society. Moreover, it kicks off a sweeping reform agenda that
includes the pension program, labor market, education system, and
capital markets.
It’s also notable because the center-left Democratic Party of
Korea and the conservative People Power Party were able to show
bipartisan support and a public consensus to reach a deal,
especially during the recent tumultuous political events that
took place in Korea.
That said, the reform also has some potentially negative economic
impacts. Higher pension contributions could squeeze households'
disposable income, putting mild but additional downward pressure
on aggregate consumption and savings. Especially considering that
as people age, they tend to consume less – and this can lead to a
structural slowdown in private consumption.
Despite Korea's challenges with an aging population, we're
cautiously optimistic about its future – especially because [of]
the recent rebound in the country's fertility rate. After marking
a drop every year since 2015, it rebounded to 0.75 in 2024. While
still far below the ideal replacement ratio of 2.1, this rebound
is a small but certainly a positive sign.
Looking ahead, Korea's working population is expected to decrease
by 50 per cent in the next 40 years unless the country ensures a
dramatic rebound in the fertility rate to 1.0 or higher by 2030.
In the meantime, we expect further adjustments to the pension
reform bill, we expect further discussions around lifting of
retirement age, along with the labor market reform next in line
on the economic front. The Korean government will continue to
execute on its demographic policy agenda.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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