[Edaily Reporter Lee Jeong-yoon ] Warnings have emerged that as South Korea ages at a rate three times faster than the United States, the impact of an aging population will begin to take full effect across growth, fiscal, and monetary policies. In particular, because the aging process began later in South Korea, there is less time to respond to the impact; steep demographic changes are expected, to the extent that the retirement age would need to be raised by about 20 to 25 years just to maintain the current old-age dependency ratio. Experts warn that the demographic shock—which triggered Japan’s prolonged economic stagnation—could unfold even more rapidly in South Korea.

◇Growth and Interest Rates Driven Down by Aging Population… Fears of a Repeat of Japan’s Long-Term Stagnation

Studies presented on the 2nd at the conference “The Economics of Population Aging and Longevity: From Challenge to Opportunity”—jointly hosted by the Bank of Korea, the Center for Economic Policy Research (CEPR), and the Organization for Economic Cooperation and Development (OECD)—highlighted the possibility that rapid population aging could reduce the Korean economy’s growth potential while simultaneously narrowing the scope for fiscal and monetary policy.

Fumio Hayashi, Professor Emeritus at the National Graduate Institute for Policy Studies (GRIPS) in Japan, analyzed that “Japan’s 30-year prolonged stagnation can be explained in large part by its aging population, which began earlier than in other developed countries.” He noted that the faster the pace of aging, the lower the growth rate tends to be, and that Japan was no exception to this trend. Japan’s demographic transition occurred about 30 years earlier than in other developed countries.

The outlook suggests that South Korea may face similar pressures leading to a slowdown in growth in the future. South Korea’s aging rate from 2020 to 2050 is projected to be 0.96—more than three times that of the United States (0.31)—making it the second fastest after Hong Kong. Professor Hayashi pointed out, “The ‘reversal of fate’ observed in Japan could repeat itself across East Asia.”

Rapid aging places a burden not only on growth but also on monetary policy. Researchers at the Bank of Korea’s Economic Research Institute estimated that if the fertility rate (1.71 children) and life expectancy (72.2 years) had remained at 1991 levels, the equilibrium real interest rate in 2024 would have been approximately 1.4 percentage points higher than it is today. This can be interpreted to mean that aging has acted to lower the economy’s optimal interest rate level itself.

Analyses also indicate that aging will lower the average annual inflation rate by 0.15 percentage points between 2025 and 2070. It was found to have a negative impact on financial stability as well, such as by lowering banks’ capital adequacy ratios and increasing the risk of default. In particular, the impact was greater for financial institutions with a higher proportion of real estate loans.

Researchers at the Bank of Korea concluded, “If structural reforms—such as a recovery in the birth rate, expanded employment among the elderly, and productivity improvements—are implemented, the scope for monetary policy maneuvering will expand.” It was estimated that if structural reforms are carried out, real interest rates and growth rates from 2025 to 2070 would remain approximately 1 percentage point higher on average per year than they would otherwise.

◇The Paradox of Belated Aging… “Shorter Window for Fiscal Adjustment”

Since Korea’s aging process began late, it has little time to respond. Professor Selahattin Imrohoğlu of the University of Southern California noted, “Late-aging countries like Korea and China must undertake much more drastic fiscal adjustments within a much shorter timeframe than countries that began aging earlier,” adding, “In the process, their growth potential also weakens.”

Applying the United Nations’ (UN) low-population scenario, it is estimated that the old-age dependency ratio in South Korea and China will rise from less than 30% in 2024 to a level where there will be approximately two elderly people for every person of working age by 2100. Simply put, this structure involves a shrinking working-age population coupled with a rapidly growing elderly population that needs to be supported.

Maintaining this burden at current levels would require significant adjustments. The study found that countries experiencing late-stage aging would need to raise the retirement age—defined as age 65—by approximately 20 to 25 years to maintain the old-age dependency ratio at 2024 levels. This means that demographic changes are occurring so rapidly that it would be difficult to sustain the current dependency structure through retirement age extension alone.

However, the impact of aging on public finances and economic growth differed. While the required increase in the retirement age grew larger as the rate at which the old-age dependency ratio rose from 25% to 50% accelerated, no clear correlation was observed with the degree of economic growth slowdown. The research team analyzed this by noting that fiscal pressures and growth pressures “operate through different pathways.”

Accordingly, the researchers recommended that pension systems and retirement ages be adjusted proactively before demographic conditions reach extreme levels. They also proposed introducing a mechanism—similar to Japan’s—that automatically adjusts pension benefits in response to demographic changes. They pointed out that “the longer adjustments are delayed, the greater the necessary adjustments to benefits, contribution rates, and retirement ages will inevitably become.”