[Insight & Opinion] Regrets on Government Bonds for Individual Investors

A Product for High-Net-Worth Individuals, Not Ordinary Citizens
Policies Needed to Encourage Investment in Industrial Capital

Last September, the revised Enforcement Decree of the National Debt Act, which stipulates that government bonds purchasable only by individuals will be issued starting from the first half of next year, passed the Cabinet meeting. The Ministry of Economy and Finance stated that the main purposes are to diversify demand for government bonds and support individuals' stable long-term asset formation. The bonds will be issued in two types: 10-year and 20-year maturities, with individual investments allowed from a minimum of 100,000 KRW up to a maximum of 100 million KRW annually. Good news for investors is that special tax treatment with separate taxation will be applied to encourage investment expansion, along with benefits such as additional interest payments. Since investments are made through dedicated accounts opened at financial institutions, the reality that ordinary people found it difficult to invest in government bonds has improved, leading to overwhelmingly positive evaluations in the media.

However, taking a closer look at the details of these government bonds raises some doubts. Since the product cannot be traded in the market and requires early redemption when cash is needed, this product resembles a fixed deposit or long-term savings insurance product with a 10- or 20-year maturity rather than a bond, based on our understanding. Despite government bond interest rates generally being significantly lower than other products, institutions hold large amounts of government bonds primarily for safety and market liquidity. In cases of urgent cash needs or to realize profits during investment management, they must be able to sell anytime in the market. But this government bond product lacks such liquidity and only allows early redemption like deposits or insurance.

Logically, government bonds have lower interest rates than any other interest-bearing products. Given this, a product without liquidity is unlikely to succeed significantly. However, if the Ministry of Economy and Finance offers excessive incentives, sales volume could increase successfully, which would pose an even bigger problem. This product has two major side effects that become concerning upon careful consideration, though they may not be immediately apparent.

First, government bonds for individual investors should be seen not as products for ordinary people investing their pocket money but as products for high-net-worth individuals aiming to avoid comprehensive financial income taxation. It appears that the government’s financial burden will increase to provide incentives to asset owners earning tens of millions of KRW or more in financial income annually. Unlike other products offering tax benefits such as Individual Savings Accounts (ISA), which have subscription restrictions for wealthy individuals, this product shows no such limitations. The subscription limit is also very large, allowing a family of four to invest up to 2 billion KRW over five years. (The 14% separate taxation limit is 200 million KRW per person.)

Second, this product encourages wealthy individuals to keep their vast funds safely stored rather than investing them in areas that significantly benefit the national economy. Besides wealthy individuals, there are plenty of other buyers of government bonds. For the economic development of a capitalist country, government policies that encourage wealthy individuals’ money to be invested in industrial capital such as stocks and venture finance, accepting some risk, are very important. Due to Korea’s chronic “real estate concentration culture,” the phenomenon of money not flowing into industrial capital is severe, and individual government bonds only deepen this problem.

This product should be revised now to serve as a tool for asset formation for ordinary people rather than a “wealthy giveaway.” Instead, restrictions on wealthy individuals’ participation in somewhat riskier industrial capital products like ISAs or venture funds should be removed, and active tax benefits should be provided. The economic effect would surely strengthen the Korean government bond market. A country where capital flows well is a true capitalist nation.

Seojun Sik, Professor of Economics, Soongsil University

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