Report: Spending on Aged Will Spike

Expected to Rise Sharply after 2020-

According to the Standard and Poor’s recent report, Korea’s government spending related to aging population will increase dramatically in the near future. In particular, the pace of increase is expected to be double the average of that of the nations studied.

From 2005 to 2030, the government spending related to population aging will grow by 8.5 percent, double the average of 4.2 percent in 32 regions studied. An expected increase of 3.2 percent from 2005 to 2020 is also much higher than the average of 2.0 percent.

S&P predicted in the report, “Until the early 2020s, government spending will not rapidly increase, but beyond 2020, when a significant number of Koreans retire and the low-birth generation who were born in the early 2000s become adults, spending on aging population will surge.”

S&P published the report based on Korea’s total fertility rate of 1.19 in 2004, but as the rate fell to 1.08 in 2005, one of the lowest in the world, the spending may be greater than what the report predicted. The total fertility rate indicates the average number of children a woman will give birth to in her lifetime.

Regarding the size of expenditures related to aging population, pensions will be the biggest burden, followed by medical care costs and long-term care facilities, said the credit rating agency.

In 2005, spending on pensions accounted for a mere 2.6 percent of GDP in Korea, compared to Japan’s 8.3 percent and the U.S.’ 4.2 percent. Yet, by 2030, Korea will surpass Japan’s 7.5 percent and the U.S.’ 6.0 percent with 8.3 percent.

Furthermore, by 2005, the proportions of productive population aged 15 to 64 will drop to 53.5 percent of the total population, from the current level of 72 percent, third lowest following Japan (50.7 percent) and Spain (53.4 percent).

Concerns about a Possible Downgrade to Speculation Rate-

S&P warned that if the government keeps the current financial policies unchanged, the government budget deficit will reach 24 percent of GDP by 2025, downgrading national credit rate to speculation rate.

“In reality, there is little possibility that the Seoul government will neglect the budget deficit and government debt to the point where it is unable to be controlled,” said the report. “The government should take a proactive approach to tighten the government budget and reform its spending program in future.”

The agency said that it calculated based on macroeconomic indices such as economic growth rates, and inflation rates and official statistics that the governments submitted to the OECD and other international organizations.

Meanwhile, the Korea Development Institute and Korea Institute of Public Finance published a joint report last year that predicted the spending on the aging population will be 28.5 percent of GDP in 2050. This is grimmer than S&P’s simulation outcome.

Hyun-Jin Park witness@donga.com