Aging population causes spending to snowball, leading to ”financial collapse within 15 years” - South Korean report

"It is a clear fact that the future finances will worsen in the context of a rapidly aging society in Korea. Rather than increasing the fiscal deficit through the compilation of supplementary budgets, etc., we should boldly reform the expenditure structure.
"We need to reduce the burden on the people," said Jeong Yeonjun, a professor at the School of Economics and Finance at Hanyang University, in an interview with Edaily, pointing out the strain on the nation's finances caused by the rapid aging of the population.
Regarding the burden on the government, he said, "It will become more difficult to secure tax revenue in the future, and expenditure factors will increase further." Professor Chung, an expert in the field of finance, served as the 43rd president of the Korean Institute of Public Finance.
The group will participate in the 16th eDaily Strategic Forum, which will be held from the 18th of next month, and will make recommendations on the need for financial preparations in light of the worsening aging problem.
Currently, South Korea is facing an excessive increase in welfare expenditures due to the aging of the population, and the financial burden is also increasing rapidly.
Of the total expenditures (673.3 trillion won/US$647.7 billion), 54.2% is mandatory spending that the government cannot reduce. This percentage is expected to increase to 57.3% by 2028.
The more mandatory expenditures on pensions, medical care, etc. increase, the less budget is available for economic response, etc.
Professor Chung said, "If things continue like this, the government will go bankrupt in 10 to 15 years.
He suggested that rigid mandatory expenditure reforms are necessary to prepare the finances for future generations. In particular, Professor Chung pointed out that the number of local teachers is increasing every year, regardless of the decrease in the student population.
Professor Chung said, "There are many factors that lead to waste in local education grants. The population of rural areas is decreasing due to the concentration of population in the capital area.
"Therefore, the subsidies paid to local governments also need to be restructured," he said. He also argued that even bigger changes are needed for public pensions, such as the national pension and public servant pension, among mandatory expenditures.
He also pointed out that the recently passed National Pension System reform plan, which would raise the contribution rate and income replacement rate to 13% and 43%, respectively, is an "ineffective reform."
"We were able to delay the time bomb's ignition, but the size of the bomb has gotten even bigger," said Professor Chung.
Professor Chung said, "In addition, welfare finances such as long-term care insurance and health insurance will increase rapidly as the population ages, and this will lead to a decline in the scope of discretionary spending for social overhead capital and economic response."
"The scope of the budget has narrowed, and the function of national finances cannot be fully implemented," he said, emphasizing the need for reform once again.
Professor Chung analyzes that the financial burden is becoming even greater. Earlier on the 1st, a supplementary budget bill worth 13.8 trillion won (about 1.44 trillion yen) was passed by the National Assembly.
The supplementary budget for the second quarter of 2020 will increase the deficit ratio of the managed fiscal balance to gross domestic product (GDP), which indicates the country's actual financial condition, from 2.8% to 3.3%.
This means that the government will once again be unable to maintain its fiscal standard of "keeping the government balance deficit within 3%." Political and financial circles have taken the position that in a situation where domestic and international uncertainty is growing, it is essential to promote domestic demand.
However, it has been pointed out that reckless expansionary fiscal policy could create a vicious cycle of worsening finances and increasing the burden on the people. Professor Chung said, "When the economy is not doing well, it is best to make necessary savings and prepare a supplementary budget.
"It is a good thing to do this, but we must stop issuing local currencies and other methods that amount to nothing more than handing out money."
Professor Chung believes that structural reform is necessary. "If we do not prioritize structural reform of health insurance, pension reform, and reform of local government finances, the government's activities (including policy responses) will be hampered," he said.
"The time when restrictions will be imposed will come sooner than expected."