"40% of Future Generations' Lifetime Income Taxed... Fiscal Structure Reform Needed"

2024 Joint Conference on Economics
Professor Jeon Young-jun, Department of Economics and Finance, Hanyang University
Tax Increase Inevitable as Welfare Budget Grows Due to Aging Population

A study has found that without a fundamental restructuring of the fiscal system, the government's welfare budget will increase due to population aging, causing the tax burden on future generations to rise significantly to about 40% of their lifetime income.

This is because, in countries like South Korea where aging is progressing rapidly, an increase in welfare expenditures for the elderly is inevitable even if the current system is maintained. Population aging leads to a decrease in the proportion of the working-age population, resulting in a reduction in tax and social insurance revenue sources, which negatively impacts government income.

According to the Korean Economic Association on the 31st, Professor Jeon Young-jun of Hanyang University's Department of Economics and Finance will present a paper containing these findings at the '2024 Joint Economic Conference' on the 1st.

Through his study titled 'Assessment of Fiscal Sustainability through Intergenerational Accounting,' Professor Jeon analyzed the lifetime net tax burden of the current and future generations concerning future fiscal expenditures. He estimated that 13.3% of the value added (Gross Domestic Product, GDP) to be generated in the future would need to be allocated to repay the current fiscal deficit and national debt. To cover this amount all at once through next year's taxes, social insurance premiums, and contributions, funds equivalent to 41.9% of the total annual tax revenue would be required.

This burden is mainly passed on to future generations. When Professor Jeon projected the net tax burden by generation reflecting a scenario of increased tax burdens next year, it was analyzed that the increase in net tax burden is greater for future generations and for younger and child generations compared to the current generation and the elderly in the base year.

According to the study, among future generations, those born after 2012 will face a significantly increased burden, having to pay an additional amount equivalent to about 20% of their maximum lifetime income on top of the current system's burden. In absolute terms, this exceeds 40% of lifetime income. Professor Jeon explained, "Past fiscal policies and the current system have caused a considerable level of intergenerational inequality."

He suggested, "Depending on the method of policy reform, there is room to reduce the scale of the burden increase on future generations, but reforms such as uniform reductions in tax burdens and transfer expenditures will inevitably lead to increased burdens on future generations. Therefore, a fundamental restructuring of the fiscal system is necessary."

Professor Jeon Young-jun of Hanyang University’s projection of the proportion of welfare expenditure in South Korea calculated independently.

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