"When Base Interest Rate Rises, Consumption Shock... Workers > Retirees"

[Image source=AP Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] When interest rates are raised due to monetary policy tightening, the impact on consumption is greater for employed individuals than for retirees.

According to the Bank of Korea BOK Economic Research report on June 11 titled "The Impact of Monetary Policy on the Consumption of Workers and Retirees," when interest rates rise through monetary policy tightening, retirees' consumption decreases less than that of workers.

Song Sang-yoon, a research fellow at the Bank of Korea Economic Research Institute, analyzed, "The rise in interest rates and economic contraction caused by monetary policy shocks reduce wages, so household wage income decreases while interest income increases." Conversely, when monetary policy is eased and interest rates fall, household wage income increases while interest income decreases.

Typically, retirees have a smaller proportion of wage income and a larger proportion of interest income from financial assets. Therefore, when interest rates rise, the income earned through interest increases, resulting in a smaller reduction in income compared to workers.

Research fellow Song stated, "This phenomenon is particularly pronounced in countries like the United States and Japan, where retirees hold more financial assets compared to workers," adding, "The difference in financial assets between workers and retirees is one factor causing the differing consumption responses to monetary policy."

Retirees in the United States and Italy mainly hold financial assets through savings and bonds, while in Japan and Korea, savings constitute a large portion of financial assets. The scale of retirees' financial assets compared to workers is 1.74 times in the United States, 1.85 times in Japan, and 1.08 times in Italy. In Korea, it is 0.86 times, indicating that retirees do not have more financial assets than workers.

In the study, research fellow Song pointed out that the ripple effect of monetary policy on consumption may vary depending on the ratio of retirees to workers within an economy, and that a higher proportion of retirees could weaken the effect of monetary policy on consumption.

He advised, "It is necessary to recognize that the magnitude of the ripple effect of monetary policy on consumption can be influenced by various labor policies addressing aging," adding, "Policies such as extending retirement age and reemployment programs for retirees can reduce the proportion of retirees and decrease the share of wage income among retirees' income, potentially having a positive impact on the ripple effect of monetary policy on consumption."

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