New era of homo hundred, low growth in S. Korea
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Xinhua, January 4, 2012
Low growth
Population aging entails low growth as it will cause chronic labor shortage. "Population aging will stunt economic growth by reducing the number of productive population aged 15-64. South Korea is expected to see a drop in its productive population after 2015," said Kim Jeung-kun, a research fellow at SERI.
The aging makes labor supply scarce relative to capital, driving up wages compared with the rate of return on capital. The marginal product of capital reduces in accordance with the one of labor. As a result, potential economic growth slows unless there are strong gains in total factor productivity.
According to the Korea Development Institute (KDI), the South Korea's potential economic growth was predicted to slide from 4.1 percent in 2010 to 2.8 percent in 2020 and 1.7 percent in 2030. IHS Global Insight last October projected the annual average rate of real economic growth to fall to 1.6 percent over the 2031-2040 period.
An increase in the elderly also causes saving rates to decline as the elderly tend to spend rather than produce and save. It will lead to a lack of resources necessary for investment and growth.
"Rapid aging in South Korea is expected to act as a factor to weaken the potential growth over the long run as the graying leads to falling labor supply and saving rate," Kim Tae Jeong, an economist at the Bank of Korea (BOK) said in a report.
Productivity crisis
Population aging entails a productivity crisis as well. As for South Korea, the productivity issue will be of particular importance as the share of middle-aged workforce in the nation's companies has sharply increased over the past decade.
According to the Ministry of Employment and Labor, the ratio of middle-aged workers aged over 45 to young workers aged 15-29 showed a steeply upward trend, going up from 41.9 percent in 2001 to 80.7 percent in 2010.
The middle-aged workers will demand wage increases to maintain their standard of living later in life, which will lead to heavier burden for payroll costs. The South Korean firms will have to decide whether to force out their middle-aged workers to secure productivity, or retain them to utilize their skills and experience.
In addition, clustering of the middle-aged employees will cause workforce bottleneck. The workforce aging will increase the number of employees who can manage, but low company growth, caused by the graying, will diminish managerial jobs. When companies are growing, promotions are abundant, but companies with low growth will reduce their managerial posts, resulting in the spread of anxiety about job security.
Fiscal burden
The rising portion of the elderly was expected to pose a threat to the fiscal balance of South Korea as the aging pushes up costs for senior care. Standard & Poor's forecast that the nation's age- related fiscal spending, including expenditures for pensions, health care, long-term care and unemployment benefits, would expand from 5.8 percent of gross domestic product (GDP) in 2010 to 17.2 percent of GDP in 2050.
Specifically, a reduction in pension resources was expected to be the primary cause for growing fiscal burden. "South Korea has a strong fiscal position by international standards but is faced with a rapidly aging population. While the social security funds are currently in surplus, the asset position of the pension fund is projected to be depleted around 2050-60 absent further reforms," the International Monetary Fund (IMF) said in its 2010 annual staff report.
Meanwhile, pressures will mount over young people who participate in economic activities, pay taxes and support non- working people as the number of young people declines amid low fertility rates. According to the UN, the old age dependency ratio, or the ratio of those aged over 65 to productive population aged 15-64, was expected to surge from 15.4 percent in 2010 to 60.7 percent in 2050.
The South Korea's fiscal position would remain healthy in the next four to five years as there would be more tax payers than tax beneficiaries, but the fiscal burden was projected to show up in the long run amid shrinking productive population.
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