40 Years Later, National Debt at 81% of GDP... 국민연금 'Badaek' in 2056

Ministry of Economy and Finance Announces Long-term Fiscal Outlook for 2020-2060

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kim Hyunjung] Due to changes in population structure such as low birth rates and aging, as well as the effects of low economic growth, it is projected that the national debt-to-GDP ratio in South Korea could soar to 81% by 2060. If the government does not take any special measures, the National Pension Fund is expected to be depleted around 2056, and the Private School Teachers' Pension Fund is predicted to run out even earlier, by 2049.

On the 2nd, the Ministry of Economy and Finance announced the results of the long-term fiscal outlook from 2020 to 2060 reflecting these projections. The government has been releasing the "National Fiscal Management Plan," which forecasts fiscal conditions five years ahead, annually, and in 2015, it released the first 40-year long-term fiscal outlook. This announcement is the second such long-term forecast in about five years, incorporating recent trends in population changes, growth rates, and economic and fiscal conditions. The scenarios underlying the projections were divided into three categories: ▲ government non-response (status quo) ▲ growth rate response ▲ population response.

According to the projections, under the status quo scenario, the national debt-to-GDP ratio is expected to reach 81.1% by 2060. In the 2015 forecast under the same scenario, the government projected the ratio to be 62.4% in 2060, indicating a deterioration of nearly 20 percentage points. Regarding this, Naju Beom, Director of Fiscal Innovation at the Ministry of Economy and Finance, explained, "Compared to the 2015 forecast, the working-age population in 2060 has decreased by 1.29 million, and nominal GDP has dropped by 1,960 trillion won, which are decisive factors affecting the change in the national debt ratio."

In the 2015 forecast, the working-age population in 2060 was predicted to be 21.87 million, but it has decreased to 20.58 million. Nominal GDP in 2060 has fallen from 7,974 trillion won in 2015 to 6,014 trillion won.

Under the status quo scenario, if the government increases mandatory expenditures and expands revenues to about 2% of GDP through a policy mix, the national debt ratio in 2060 is expected to improve to around 65.4%.

In the growth rate response scenario, the national debt ratio is projected to be 64.5% after 40 years, and with the policy mix, it is expected to decrease further to 55.1%. In the population response scenario, which involves policies to alleviate low birth rates, the national debt ratio is expected to rise to 79.7% during the same period, but with the policy mix, it is projected to be around 64.6%.

In all scenarios, the national debt ratio is expected to peak between 2041 and 2045 and then gradually improve. The most common cause of the increase is the decline in growth rates due to population decrease. Both the total population and the working-age population are expected to decrease significantly compared to this year, leading to a gradual decline in real growth rates. However, the Ministry of Economy and Finance explains that until the mid-2040s, the debt growth rate will be faster than GDP growth, but thereafter, due to expenditure management, the growth rate will slow down.

Public pensions are deteriorating due to the effects of low birth rates and aging. The National Pension Fund is expected to turn into deficit in 2041 under the status quo and be depleted by 2056. If productivity improves through growth response, the depletion point is expected to be delayed by one year. The Private School Teachers' Pension Fund is projected to turn into deficit in 2029 and be depleted by 2049 under the status quo, while under the growth response scenario, it is expected to turn into deficit in 2038 and be depleted by 2057. The Government Employees' Pension Fund is expected to have a fiscal deficit equivalent to 0.6% of GDP by 2060, an increase of 0.5 percentage points from this year, and the Military Pension Fund's deficit is expected to be 0.17% of GDP by 2060, up 0.08 percentage points from this year.

Regarding this, the Ministry of Economy and Finance emphasized, "If we fail to properly respond to the trends of low birth rates, aging, and declining growth rates, fiscal stability could be threatened," and added, "It has been found that the sustainability of the Private School Teachers' Pension Fund and the insurance sector is insufficient due to changes in population structure, necessitating reforms." Furthermore, it stated, "To strengthen the foundation for fiscal soundness, it is necessary to pursue multifaceted measures such as expenditure management, social pension and insurance reforms, and linking welfare expansion with the national burden."

It also said, "We will expand the growth base through the Korean New Deal, promote productivity improvement through technological advancement, fostering new industries, innovation in education curricula, and enhancement of lifelong education and vocational training," and emphasized, "We will review measures to streamline existing tax exemption and reduction systems focusing on ineffective and unnecessary items, and will also push for drastic expenditure restructuring."

Meanwhile, the government plans to establish separate fiscal rules to manage the total expenditure growth rate for fiscal soundness management. Specific details and the timing of the introduction of these fiscal rules will be announced after further discussions. The long-term fiscal outlook announced today will be submitted to the National Assembly on the 3rd as an attachment to the National Fiscal Management Plan.

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