The Decline in Real Interest Rates Was Largely Influenced by Aging (Comprehensive)

From 1995 to 2018 -3 Percentage Points

BOK 'The Impact of Population Aging on Real Interest Rates'

Longer Life Expectancy Increases Savings and Decreases Consumption

More Affected by Aging than OECD Average

Expert: "The Downward Trend in Real Interest Rates is Likely to Continue... but the Decline Will Be Limited"

[Asia Economy Reporter Kim Eunbyeol] It has been revealed that Korea's population aging, which accelerated since the mid-1990s, has had a significant impact on the decline in real interest rates. The main reason is that as life expectancy lengthened, people reduced consumption and increased savings in preparation for a longer life.

According to the report "The Impact of Population Aging on Real Interest Rates," published on the 13th by Deputy Research Fellow Kwon Oik of the Bank of Korea's Monetary and Financial Research Department and others, Korea's real interest rate fell by about 3 percentage points from 1995 to 2018 due to population aging.

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 decline of 8.6 percentage points. About one-third of this decline is attributed to the impact of population aging. The report simulated how real interest rates would change if life expectancy and population growth rates moved similarly to Korea's actual data. The effects of government policies addressing aging, such as pension system improvements, various tax benefits, and health insurance systems, were not considered. Under these assumptions, real interest rates fell from about 9% to 6% due to population aging.

Among various factors of population aging, the extension of life expectancy was identified as the largest factor lowering interest rates. The increase in life expectancy had 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, real interest rates fell by about 2 percentage points, while the decline due to reduced population growth was about 1 percentage point.

Deputy Research Fellow Kwon explained, "The decline in population growth rate does not directly affect the survival period after retirement, so life expectancy appears to have a greater impact on the decline in interest rates." A longer life expectancy means a higher probability of survival. As a result, both retirees and workers increase savings and reduce consumption to prepare for the post-retirement period. On the other hand, a slower population growth rate does not lead people to increase savings or reduce consumption.

Since there is currently no way to control the aging trend, the downward trend in real interest rates is expected to continue.

According to the United Nations (UN), Korea's old-age dependency ratio (the ratio of the population aged 65 and over to the population aged 20-64) rose sharply from 9.6% in 1995 to 19.4% in 2015. It is expected to reach 23.7% this year. Life expectancy, which was recorded at 79.47 years between 2005 and 2010, is projected to extend to 82.44 years between 2015 and 2020.

Meanwhile, for OECD member countries, changes in population structure from 1990 to 2014 were found to have lowered real interest rates by about 1.5 percentage points. Most OECD countries, which experienced aging earlier, had a smaller decline in interest rates due to aging compared to Korea.

Deputy Research Fellow Kwon added, "Although human life expectancy is increasing, there are still limits. While Korea's real interest rate decline will continue, if life expectancy does not extend significantly, the decline in real interest rates is expected to be limited."

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