"Korea's Real Interest Rate Falls by 3%p Since 1995 Due to Aging Population"

Life Expectancy Increase Has Twice the Impact on Real Interest Rate Decline Compared to Population Growth Rate Decrease

[Asia Economy Reporter Eunbyeol Kim] Since 1995, South Korea has experienced rapid population aging, resulting in a decline in the real interest rate by approximately 3 percentage points. Among the factors of aging, the increase in life expectancy had a greater impact than the decline in population growth rate.

On the 13th, Ohik Kwon, Associate Research Fellow at the Monetary Policy Research Department of the Bank of Korea, stated in the report "BOK Economic Research - The Impact of Population Aging on Real Interest Rates" that due to population aging, South Korea's real interest rate fell by about 3 percentage points from 1995 to 2018.

The real interest rate, calculated by subtracting the Consumer Price Index (CPI) inflation rate from the nominal interest rate, dropped from about 9.0% in 1995 to 0.4% in 2018, a decrease of approximately 8.6 percentage points. About one-third of this decline is attributed to population aging. According to the study, assuming other factors such as policies remained unchanged, population aging caused the real interest rate to fall from about 9% to 6%.

Among various factors of population aging, the increase in life expectancy was found to have about twice the impact on the decline in real interest rates compared to the decrease in population growth rate. During the same period, when only life expectancy changed, the real interest rate fell by about 2 percentage points, whereas the decline in real interest rate due to the decrease in population growth rate was estimated to be about 1 percentage point.

A Bank of Korea official explained, "Since the decline in population growth rate does not directly affect the post-retirement survival period, life expectancy appears to have a greater impact on the decline in interest rates."

An increase in life expectancy means an increase in survival probability, which leads both retirees and workers to increase savings and reduce consumption in preparation for post-retirement life. On the other hand, a slower population growth rate does not cause people to increase savings or reduce consumption, so it had less impact on the decline in interest rates compared to life expectancy.

Associate Research Fellow Kwon predicted that if population aging continues, South Korea's real interest rate could fall even further from the current level. However, he added, "There are still limits to how much human life expectancy can increase," and "if life expectancy does not increase significantly, the decline in real interest rates due to population aging is expected to be limited."

This content was produced with the assistance of AI translation services.