This study examines the demographic trends in Korea and explores various structural reform measures to cope with future demographic changes. After World War II and independence, the Korean population surged along with the rapid growth of its relatively young population, one of the strong drivers of economic growth. However, after unprecedented rapid economic growth due to rapid population growth, the Korean population structure will enter a period of rapid contraction, leading to rapid aging of the population and a decrease in the absolute population. Because these drastic demographic changes could affect the economic and social environment, the current system needs adjustment to mitigate negative demographic impacts before they appear. Therefore, this study aims to evaluate reform measures from various perspectives, focusing on improving the efficiency of human resource utilization and enhancing the sustainability of the government’s role. It also looks at supplementary policy measures that could reduce possible side effects of the reform process.

Part 1 presents structural reform measures to improve the efficiency of using older workers. In a situation where the total population, especially the working-age population, is declining, how efficiently the elderly population is utilized is an important policy issue. For the productive role of the elderly, the gradual and effective extension of the retirement age is required as an institutional prerequisite for the labor supply of the elderly. In addition, in the process of preparing an adequate old-age income security system, it is necessary to provide sufficient incentives for the elderly to participate in economic activities. Furthermore, the government should support the maintenance of labor productivity of the elderly through lifelong education and enhance the flexibility of the labor market so that companies can create demand for the elderly by reflecting the labor characteristics of the elderly.

Chapter 2 analyzes the effect of sequentially raising the retirement age by the revised 2013 Elderly Employment Promotion Act and shows that changes in the legal upper age limit have heterogeneous effects on employment according to age, gender, and education background. The analysis finds that the retirement rates of female high school graduates and male college graduates or higher degree holders, both aged 55 years old, rather were higher than before, after the implementation of the revision. This suggests that abrupt changes to the statutory retirement age may have unintended and undesirable side effects if the burden on companies is not thoroughly reviewed. In order to extend the tenure of senior workers effectively, this chapter proposes a comprehensive and gradual extension of the retirement age in consideration of the corporates’ burden.

Chapter 3 analyzes the impact of the relaxed 2015 earnings test in the national pension scheme. The analysis reveals that those groups with relaxed earnings testing tend to supply more labor, especially those with higher education levels to a statistically significant extent. Under the assumption of the public pension's fiscal sustainability and gradual increase of the pension age, these findings suggest that abolition of the earnings test may improve the work incentives of the elderly.

Chapter 4 analyzes the survey results on applicants to the Lifelong Education Voucher Program in 2019. According to the analysis, the voucher program effectively motivates participation in learning activities to a meaningful extent. However, active voucher users are different from the active applicants of the program support, so we need to consider better-targeted support to enhance policy effectiveness. Since the learning motives of basic livelihood support recipients and those in the next lower income class are relatively low, it is necessary to consider additional policy measures in addition to the small voucher incentives.

Chapter 5 analyzes the Korean workplace panel survey (WPS). According to the results, firms with a large share of older people in the workforce show the higher the portion of part-time workers, the higher the level of workforce productivity. On the contrary, the lower workforce productivity, if a labor union exists at such firms. The analysis also shows that operating profit decreases when the proportion of older workers in companies with a labor union increases. This may be because, given the current seniority-based wage structure, it is more difficult to dismiss or adjust the wages of older workers due to obligations to agree with the labor union in a situation where they are more likely to receive real wages than labor productivity. In addition, in the case of companies with a high proportion of part-time workers or replacement workers, overall labor productivity increases along with the proportion of older workers. In this sense, the flexible working system can be useful both individually and as a company to increase labor productivity and encourage companies to retain and hire older workers.

Part 2 examines structural reform measures for sustainable fiscal management. Fiscal spending on the aging population increases, but tax revenue may decrease due to a decrease in the working-age population, raising concerns about the government's fiscal sustainability due to the aging and decline of the population. Not only that, the decrease in the youth population may lead to a reduced supply of military forces, adding another layer of uncertainty for the national defense amid the long-standing tensions on the Korean peninsula. In order to achieve the policy goal of sustainable fiscal management, it is necessary to enhance the effectiveness of resource allocation continuously through efficient expenditure restructuring and to expand the tax base as a source of revenue to provide sufficient government resources.

Chapter 6 shows that when calculating the age of the elderly based on the remaining life expectancy, there is a possibility that the threshold age of the elderly could continuously increase by about one year over the next ten years. Considering the burden of disease and disability, gender, region, and income gap, we propose a long-term plan to gradually raise the threshold age of the elderly. A case analysis of the urban railroad senior fare discount system examines the policy considerations for such a long-term age adjustment plan. For the policy goal of securing mobility of the elderly, we propose to increase the age gradually, taking into account the demographic characteristics of the region, the elderly's usage behavior, and the degree of congestion. In addition, we can consider complementary policies such as supplementary transportation vouchers.

Chapter 7 underscores efficient public spending on education through a sensible teacher supply policy, as the overall population, together with the school-age population, will decline. If we train and hire teachers according to the existing teacher supply plan, we expect the class sizes to continue to shrink as the school-age population decreases. We find that a smaller class size improves the academic performance of some elementary and middle school students and has positive effects on elementary students' non-cognitive ability, but the magnitude of the positive effects is not significantly large. Given the recently disclosed number of teachers by age and the published target number of students per teacher, this suggests the possibility of hiring fewer new teachers without compromising the quality of education in the future.

Chapter 8 shows that it is necessary to consider the reforms of the local budget system in order to improve the fiscal sustainability and efficiency of local governments amid changing demographic trends. We anticipate that Korea's demographic challenges of aging and shrinking population will unfold unevenly by region. Against this backdrop, since local governments receive support for local education expenses as a fixed percentage of national tax revenues, the education spending per student will increase steeply and unevenly by region. Accordingly, we recommend revising the methods of allocating local education subsidies in consideration of the school-age population and the number of teachers by region. In the longer term, we propose to streamline local education subsidies and local government general budgets by consolidating them into a single category. This measure will help remove silos among different budget holders and enable comprehensive budgeting for local authorities, eventually securing fiscal efficiency and accountability at the local level.

Chapter 9 emphasizes the importance of military forces trained over an extended period. Because it is impossible to maintain the current large-scale military force due to population decline, it is necessary to reorganize military force from labor-intensive to capital-intensive. Through international comparative analysis, we show that the probability of choosing the volunteer military service system increases as the proportion of the working-age population decreases, and the probability of choosing the compulsory military service system increases as the number of experiences in conflict increases. Given the declining working-age population, the voluntary military service system may be a viable option. However, the confrontation with North Korea and the fairness of military service are obstacles to a full-scale voluntary system. Therefore, we suggest gradually shortening the period of military service to put the skills and talents of young people to productive use while maintaining the current conscription system. At the same time, we propose to devise a plan to gradually expand the training of professional military soldiers and extend the retirement age of senior officers.

Chapter 10 emphasizes the need to prepare a mid- to long-term tax policy to secure sufficient financial resources in response to changes in the social demand for fiscal spending driven by demographic changes and examines alternative financing methods with a focus on value-added tax (VAT). Compared to major countries, Korea’s income tax and VAT burdens are relatively low, and the VAT revenue base will shrink due to demographic changes, especially consumption patterns by age. This chapter proposes increasing the basic tax rate and abolishing some tax reductions to maintain the current VAT revenue. Considering the income distribution effect of the abolition of tax reductions, we propose abolishing the tax reductions for education, finance, and medical care as well as introducing and maintaining a reduced tax rate system for essential consumer goods and services for vulnerable groups, which can make the VAT less regressive. It is desirable to establish a reasonable system of tax reduction through social consensus along with an increase in the value-added tax rate.

Preface
Executive Summary

Chapter 1 Historical Trends of Demographic Changes and Policy Challenges
　Section 1 Introduction
　Section 2 General Trends of Demographic Transition
　Section 3 Demographic Transition in Korea
　Section 4 Policy Challenges and Responses to Demographic Changes
　References

Part 1 Efficient Utilization of Human Resources

Chapter 2 Current Status and Improvement Measures for the Elderly Labor Market
　Section 1 Necessity of Policy Intervention in the Elderly Labor Market
　Section 2 Current Status and Trends in the Elderly Labor Market
　Section 3 Effects of Retirement Age Extension on Career Transitions, Reemployment, and Labor Income
　Section 4 Conclusion and Policy Implications
　References

Chapter 3 The National Pension Earnings Test and Elderly Labor Supply
　Section 1 Introduction
　Section 2 The Earnings Test
　Section 3 Analytical Methods
　Section 4 Analysis Results
　Section 5 Policy Implications
　References
　Appendix

Chapter 4 Effects and Implications of the Lifelong Education Voucher Program
　Section 1 Introduction
　Section 2 International Cases and Literature Review
　Section 3 Institutional Background
　Section 4 Empirical Analysis
　Section 5 Implications
　References
　Appendix

Chapter 5 Productivity Enhancement Measures in Response to Demographic Changes
　Section 1 Introduction
　Section 2 Literature Review
　Section 3 Empirical Analysis 1: OECD Country Panel Analysis
　Section 4 Empirical Analysis 2: Workplace Panel Survey (WPS) Analysis
　Section 5 Summary and Policy Implications
　References

Part 2 The Role of the Government in Ensuring Sustainability

Chapter 6 Adjusting Age Criteria for Elderly Welfare Policies
　Section 1 Problem Statement
　Section 2 Current Age Criteria for Elderly Welfare Programs
　Section 3 Automatic Adjustment Based on Life Expectancy Extension
　Section 4 Case Study: Senior Fare Discount System in Public Transport
　Section 5 Conclusion
　References
　Appendix

Chapter 7 Declining School-Age Population and Teacher Supply Policy
　Section 1 Introduction
　Section 2 Projections of Declining School-Age Population and Key Education Indicators
　Section 3 Relationship Between Class Size and Academic Performance
　Section 4 Relationship Between Class Size, School Life, and Non-Cognitive Skills
　Section 5 Policy Review
　Section 6 Conclusion
　References
　Appendix

Chapter 8 Measures for Improving Fiscal Efficiency in Local Governments Amid Demographic Changes
　Section 1 Problem Statement and Key Issues
　Section 2 Empirical Analysis of Aging and Local Fiscal Conditions
　Section 3 Analysis of Local Education Fiscal Conditions
　Section 4 Policy Recommendations
　References

Chapter 9 Demographic Changes and Military Workforce Systems
　Section 1 Introduction
　Section 2 Environmental Factors
　Section 3 Low Birthrate and Changes in Military Manpower Resources
　Section 4 Military System Selection Model
　Section 5 Choices in Military Systems
　Section 6 Conclusion and Policy Alternatives
　References

Chapter 10 Alternative Fiscal Resources: Focusing on Value-Added Tax
　Section 1 Introduction
　Section 2 Aging Population, Long-Term Fiscal Conditions, and Revenue Structures
　Section 3 Aging Population and Value-Added Tax
　Section 4 Identifying New Revenue Sources
　Section 5 Conclusion
　References
　Appendix

ABSTRACT