The world is struggling to find solutions to the problems of low fertility and aging. Korea is no exception. Aging is not simply a demographic transformation. It is closely linked with economic growth. It is an intergenerational solidarity issue as well. Our ultimate goal is three-fold: good management of aging, fiscal sustainability, and continuous economic growth. However, it seems impossible to achieve the three goals at the same time. But there is a way ahead if we look at things from a different perspective.
Korea has an ambitious plan to tackle the issue. We are trying to reverse the trend of low fertility with various incentives. We are also developing new engines of growth while making better use of untapped
talents in our labor force. And we are working to help baby boomers prepare for their retirement and retirees to be more active. Korea is not the first country to attempt such action plans. And success is not guaranteed unless we change our attitude and way of doing business. Key to success seems to lie in the social consensus.
Economic sustainability is important. But intergenerational solidarity is even more important for a society to prosper.
Aging has some negative nicknames. “Demographic time bomb” is one, and “Age-quake” is another. They all capture the enormity of the challenge. Thus the world is preoccupied with finding solutions for the daunting challenges of low fertility and aging. Korea is on the edge of a precipice because its aging is the fastest in the world. With a fertility rate as low as 1.24, Korea is entering into an aged society in five years and a super-aged society in just 14.
This is not simply a demographic transformation. A society with many old people is not such a big problem in itself. We can provide them with necessary means of living in retirement and sufficient medical services. But things are not that simple. An aged or super-aged society is a potential catastrophe because it is necessarily linked with low birth so that there are fewer workers to support the elderly and sustain and grow the economy. Governments have to spend enormous amount of additional budget to finance the aged. Discontents emerge between generations. Younger generations complain about their growing burden for supporting over-the-hill generations.
The Korean Case
Let me elaborate on the acute situation in Korea. When our government implemented birth control policies in the 1970s and 1980s, it would have been hard to imagine that Korea’s fertility rate would fall to 1.24. Maybe the past policy was too successful. Now, Korea’s fertility rate is only slightly over the half the replacement rate of 2.1. If this trend continues, our population will peak in 2030 before starting a rapid decline. For the working-age population, the peak year is 2016—only three years away.
Everything in Korea seems to move fast. The proportion of elderly population tripled in a single generation; from 3.5 percent in 1975 to 11 percent in 2010. We are reaching a super-aged society with over 20 percent of old people in only 14 years from now. By 2050 the elderly population is projected to make up 37.4 percent, with more than half aged over 75. The old-age dependency ratio will more than quadruple from 15.2 in 2010 to 71.0 in 2050. While it takes eight young people to support every old man now, the same burden should be borne by only two in 2050.
It is also a potential “demographic time bomb” on our economy. Expenditures in pension should rapidly increase from 0.9 percent of GDP in 2010 to 5.5 percent in 2050. The favorable demographic structure for the economy is coming to an end. The potential economic growth rate of current 4.6 percent is expected to be reduced to a mere 1.4 percent in 2050.
Direction for the Solution
We have to do something, something big, and urgently. Maintaining the status quo is not an option. We have three goals to achieve at the same time: good management of aging, fiscal sustainability, and economic growth. We need to keep the economy rolling and provide social services for the elderly while maintaining fiscal balance. However, the current economic and social structure does not enable us to do so. We can currently achieve only two, not all three.
To borrow a term from international economics, we are in a situation of “trilemma” or “impossible trinity”. In economics, it is impossible to achieve a fixed exchange rate, free capital movement, and independent monetary policy at the same time. We can only pick two, not all three. Likewise in aging, unless things change, it seems to be impossible to achieve all three goals. We can manage aging and get economic growth, but not without detriment to budget balance. We can manage aging and sustain the fiscal health, but only without economic growth. And we can get economic growth and fiscal sustainability, but only with little or no service to the old people.
Then is there no way out? Fortunately, there is. Unlike the impossible trinity in international economics, we can surely escape from the aging trilemma. We can do it by changing the status quo, by changing the modus operandi of our economy, and by changing the attitude of people. But it is by no means easy. We will have to make some tough choices.
Korea’s Plan to Tackle the Low Fertility and Aging
We do have a plan. We made a law in 2005 (Framework Act on Low Birthrate in an Aging Society) and established a presidential committee in the same year. Governmental action plans have been implemented since 2006. And we are now in the second phase of the “Basic Plan on Low Fertility and Aging Society 2011-2015.”Naturally our goal is to increase the fertility rate and to successfully cope with the aging society. In order to achieve it, we have set three main tasks.
The first pillar is to create a favorable environment to raise the fertility rate. We are strengthening the system of child care leave and flexible working hours to help parents balance work and family. At the same time, we are ensuring that the burden will not be left only to families but shared by government, businesses and society by increasing public and private child care centers and awarding certification to family-friendly companies.
Second, we are trying to develop a new engine that will drive the economic growth against low fertility and aging through institutional adjustments to cope with demographic changes. We will make better use of untapped human resources including women and foreign workers. Socioeconomic systems of education, housing, finance and so on should be changed accordingly.
Third, we are working to help baby boomers prepare for their retirement. The government is making efforts to provide diverse employment opportunities, old-age income security, and preventive health management for them. Meanwhile, for the current elderly population, our efforts concentrate on the Basic Old-Age Pension, job creation, and the expansion of long-term care.
Korea’s Initiative to Embrace Baby Boomers
I will elaborate on the third pillar. Last July, the Korean government announced the action plans to create new opportunities for retiring baby boomers. “Active aging” or “productive aging” is the key word. They should be given opportunities to actively pursue meaningful lives. AARP’s motto “to serve, not to be served” hits the mark.
First, we will delay retirement for as many working people as possible. The age ceiling in public institutions will be raised, and exclusive jobs for retirees are to be expanded and new ones created. Their initiative to business start-ups will be encouraged and relevant retraining will be provided. Second, we will support those who want to resettle in rural areas for agricultural activities with necessary information, customized training, and financial assistance. A large number of Koreans are thinking of “home-coming” to cultivate farms after retirement. Third, we will work to expand the programs where retiring baby boomers can volunteer to share their talent and expertise. They would find themselves valuable to the society.
The blueprint for baby boomers is an important, but only a partial, section of the whole picture. The supplementary measures to the “Basic Plan on Low Fertility and Aging Society 2011-2015”, announced last October, encompass 62 core projects in five areas. They are designed to accomplish five essential values for aging and aged citizens: income security, continued health, social participation, comfortable housing and transportation, and smooth transfer to post-retirement.
The basic principle of the whole scheme may be summarized as “to serve, and to be served.” Those who are able and willing to serve will be encouraged and supported to do so. Those who need to be served will be served. And those who like to serve but need to be helped to serve will be enabled and assisted accordingly.
Intergenerational Solidarity Revisited
The OECD conducted an attitudinal survey for 21 members in 2009. It asked a provocative question; “Are older people a burden on society?” The results were interesting. Overall, only 14 percent of people answered yes. An absolute majority of 85 percent disagreed. More interestingly, people aged 40-50 who expect to retire soon strongly disagreed. But already retired old people tend to think of themselves as a burden. What about young people? They tend to think likewise.
Cross-country comparison shows that people are more likely to agree in countries where old people receive a high portion of incomes from the state. And interestingly again, intergenerational relations seem to be stronger where other sources play a more important role in old age incomes. And intergenerational solidarity seems to be strongest when older people are seen to be helping themselves, either by continuing to work or by preparing private savings.
We do not have such surveys yet in Korea. But I presume that the OECD’s findings may also apply to Korea as well. If we live longer, it may be inevitable for us to work longer. And if we work longer, there may be less tensions between the generations in the future. Are we really ready to work longer and postpone a work-free, always-holiday life? Are we really ready to get a reduced amount of pension? Even though we do want to work longer, is it acceptable to young people? Don’t they think it is shrinking their job opportunities? Can it appeal as a popular choice for politicians and voters?
Paradigm for Sustainability under Low Fertility and Aging
The answers are likely to be negative if we look at things from the current socio-economic framework. Paying more tax for both babies-to-be-born and people soon-to-be-retired is by no means appealing to the working age generation. The zero-sum game perception of jobs taken by elders as lost jobs for young people does not lead to any feasible solution for the entire society. If retirees insist on a high pension without being asked to work longer, the aging “trilemma” cannot be avoided. Sustainable economic growth under low fertility and aging is not possible if we continue to count only people between age 15 and 65 as the labor force population.
We have to make hard choices as well. Seniors should contribute to the economy as long as they can. They should be given chances to work if they want to. And they need to be more proactive and responsible to prepare for their own retirement. More importantly, a favorable environment must be created to reverse the trend of low fertility. Better childcare services, more flexible working hours, and greater investment in education are likely to lead to higher short term fiscal burden and higher taxes. But in the long run, all of these actions will pay off. And it seems to be the only option we have to escape the trap of an aging trilemma.
The Korean government’s initiative to tackle the “age boom” covers all these aspects. Needless to say, ours is not the first attempt. We draw on experience and expertise from other forerunners in Scandinavian and other European countries. But socio-economic institutions are difficult to transplant from one country to another. We may need to undergo a certain period of trial and error. What matters is how we can wisely shorten the transition.
What matters again is how we can sensibly persuade and mobilize the public for social consensus. Sustainable economic growth is important. But intergenerational solidarity is even more important for a society to keep existing and prospering while it ages.
Chemin Rim was appointed Minister of Health and Welfare in 2011. Prior to this, Dr. Rim served as Vice Minister of the Ministry of Knowledge Economy; Standing Commissioner, Presidential Commission on Small and Medium Enterprises; and Commercial Counselor at the Korean Embassy in Washington, DC. Minister Rim received his M.A. in International Studies at Johns Hopkins University and a Ph.D. in Economics at Kyunghee University.