KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Women’s Career Interruptions and the Declining Fertility Rate in South Korea

In South Korea, more women are postponing or forgoing childbirth due to concerns about career interruption. Their conscious decision to refrain from motherhood is estimated to be responsible for about 40% of the decrease in the fertility rate. In the face of the world’s lowest fertility rate, Korea needs to overhaul its policies to better support work-life balance, enabling parents to maintain their careers while raising children.

- Traditional economic theory explains the decline in fertility rates as a result of the increase in women’s opportunity costs.

- Since the 2000s, a positive correlation between women’s labor force participation rates, income, and fertility rates has been commonly observed in high-income countries, which appears to be closely associated with the extent to which women (mothers) can balance work and family life.

- South Korea’s low fertility rate may have stemmed from the disproportionate burden of childcare on women, combined with the persistent difficulty in balancing work and family life, leading women to postpone or forgo childbirth.

- If the presence of children significantly affects women’s probability of career interruption, the number of women who forgo childbirth while maintaining their careers due to these concerns may increase.

- If young women choose to have children, their probability of career interruption increases by about 14%p, leading to a higher likelihood of experiencing a substantial level of economic loss throughout their lifetime.

- Since the mid-2010s, Korea’s total fertility rate has rapidly decreased, as the gap in career interruptions based on parenthood status has widened.

- Recently (2013~19), the gender employment gap has narrowed. Still, this converging trend has been limited to the young without children, ironically increasing the women’s opportunity costs for choosing to give birth. This increased child penalty is estimated to account for about 40% of the overall decline in the fertility rate.

- Policies aimed at preventing career interruptions for women with children are expected to contribute to raising the fertility rate by reducing the number of women who delay or forgo childbirth.

- Policies that mitigate career interruptions for women with children can increase labor supply and prevent the erosion of irrecoverable human capital, thereby not only helping to raise the fertility rate but also promoting macroeconomic growth.

Summary

KDI FOCUS Korea’s National Pension: Structural Reform Measures

South Korea has been under acute pressure to sustain its National Pension Plan without the risk of fund depletion. Given the looming fiscal threat, this study proposes the introduction of a new pension, a fully-funded system designed to ensure intergenerational equity. This reform aims to guarantee that future generations can receive pension benefits equivalent to the contributions paid and investment returns, without the fear of resource exhaustion. For contributions made prior to the reform, the benefits promised under the existing plan should be honored, while addressing the resultant financial shortfalls of the old pension through separate management and strategic utilization of the general budget to bridge these gaps. This study stresses the urgency of immediate action since the prompt implementation will substantially reduce fiscal stress.

- Under the current scheme, South Korea’s National Pension Fund is projected to be depleted by 2054. As a result, subsequent increases in contribution rates will be prohibitively high for future generations.

- Amid rapid shifts in demographic structure, it is essential to undertake structural reforms and adjust pension parameters to enhance intergenerational equity.

- This study proposes pension reform measures that can keep the expected return rate around one, while approaching this target rate is challenging in Korea, particularly due to the sharp decline in the total fertility rate.

- Provided that the current operation is maintained, increasing the contribution rate from 9% to 18% is likely to result in the reserve fund's complete depletion by around 2080.

- To avoid imposing undue burdens on future generations, adopting a fully-funded “New Pension” system with an expected return rate one is essential.

- With a 15.5% contribution rate, a fully-funded new pension plan will sustain the current average benefit levels for those born in 2006 and later.

- The parallel operation of the old and new pension plans means that the expected return rate gradually declines for each successive birth year, converging to one for those born in 2006 and later.

- To support the adoption of the New Pension, it is necessary to consider measures that ensure the general budget covers the unfunded liabilities of the old pension, estimated at approximately 609 trillion won (26.9% of GDP).

- Since providing general finances early and swiftly minimizes the nominal fiscal burden, it is advisable to initiate fiscal injection before the old pension fund is depleted.

- Delaying the reform of the fully-funded new pension plan by five years is expected to result in an additional 260 trillion won in unfunded liabilities that will need to be covered by the general budget.

- Even though the expected return rate of public pensions is similar to that of private pensions, the necessity of public pensions for social stability is wellrecognized, and worth considering is the fact that Korea’s NPF has recorded somewhat higher returns than private ones.

- With high uncertainties like dramatic demographic changes, bolstering the financial stability of the new pension system requires transitioning from the Defined Benefit (DB) model to the Defined Contribution (DC) model.

- Unlike individual account systems, applying a DCtype pension to age cohorts enables the integration of an income redistribution function.

- In a new DC pension system, it is possible to adjust the income replacement rate through modifications to the contribution rate.

Summary

Research Monograph KOR Who is the Middle Class in Korea?

This study delves into significant discrepancies between the objective and subjective middle classes in Korea, potentially prompting a diverse range of grievances from different economic groups in middle-class discourse. It emphasizes the necessity of examining the multi-layered nature of the so-called "subjective middle class" and its impact on the discourse, together with the causes of such discrepancies and the various challenges that may arise.

The study employs an independent survey to gauge Koreans' class perceptions through two web-based panel surveys. The first survey, conducted in May 2023, queries participants on their objective income and asset levels, subjective class affiliation, satisfaction with living standards and prospects for upward mobility, perceptions of income distribution and inequality, and views on socioeconomic policies. It aims to analyze whether a systematic downward bias exists in self-assessment of one's position in income distribution, patterns of bias and their causes, and potential distortions such bias can cause in policy attitudes.

The subsequent survey, conducted in September 2023, incorporates an experimental component to observe the effects of information on social perception and policy attitudes. It identifies participants' objective class positions using data from the first survey and then shares this information with them. By randomly assigning participants to two groups and providing exact class standings on income distribution to only one group, this study enables an empirical analysis of differences in attitudes toward various social policies, including middle-class awareness and support for redistribution policies, between the feedback-receiving group (treatment group) and the group without feedback (non-treatment group).

The empirical analysis in this research draws from these surveys, with Chapters 2 and 3 based on the first survey (N=3,434) and Chapters 4 and 5 on the second (N=2,000). This report is organized as follows. Chapter 1 presents the necessity and direction of middle-class research, focusing on the concept of the middle class and discussions surrounding the middle-class crisis. Chapter 2 reviews previous studies on objective-subjective class inconsistency, conducts international comparisons using available data, and explores the determinants of subjective class consciousness among Koreans. Chapter 3 compares perceptions of class inequality and policy attitudes on various issues by reclassifying the category of the "socio-economic class" in consideration of the multi-layered nature of the middle class in Korea. Chapter 4 examines the changes after correcting perception biases through objective class information based on the experimentally designed results of the second survey. Chapter 5 assesses the varied cognitive structures and policy preferences within the multi-layered structure of the Korean middle class and examines whether this may lead to policy distortion in the context of discussions on the privileged middle class or elite hereditary succession. Finally, Chapter 6 summarizes the findings and discusses their implications.

Summary

Policy Study KOR A Study on Elderly Poverty: Focusing on Income and Consumption

This study investigates elderly poverty in South Korea by incorporating both consumption and income to provide a comprehensive assessment of the economic status of the elderly population. By examining these two factors, the study aims to identify vulnerable groups experiencing financial difficulties across multiple dimensions. The findings underscore the variability within income poverty among older adults, highlighting notable differences based on asset holdings. Accounting for both income and consumption allows a more nuanced understanding of elderly poverty, revealing vulnerable groups facing economic hardships in both dimensions. Furthermore, elderly poverty is examined across generations, showing that its high rate in Korea primarily stems from pre-1950s cohorts, who benefited less from rapid economic growth and pension schemes. Consequently, effective poverty alleviation strategies should target the older and poorer demographic relatively left out of economic growth and pension programs. Restructuring the Basic Pension to offer substantial support to vulnerable groups, while excluding high-asset but low-income individuals, can enhance the system’s sustainability and effectiveness in poverty alleviation.

Summary

KDI FOCUS Assessing Old-Age Poverty with Income and Assets: Generational Insights and Policy Directions

Korea’s old-age poverty rate, based solely on income, ranks among the highest in the OECD. While the rate drops slightly when assets are considered, it remains persistently high. There are marked disparities in poverty rates across different elderly birth cohorts, with older groups facing higher rates. A greater share of the low-income, low-asset segment also marks the observed inequality. To effectively address poverty among the elderly, policy efforts should prioritize support for the oldest members of this vulnerable low-income, low-asset segment. Concurrently, financial assistance for seniors in the low-income, high-asset group should be scaled back. A practical move toward this direction would be revising the eligibility criteria for the Basic Pension to include asset-inclusive pensionable earnings.

- Korea’s old-age poverty rate was 43.4% in 2018, the highest among OECD countries (average 13.1%).

- The old-age poverty rate varies markedly across the five elderly generations, with those born in the 1940s or earlier having the highest rates.

- The recent decrease in the old-age poverty rate and the disparities seen across age cohorts can likely be attributed to the growing proportion of individuals born in the 1950s who tend to be less impoverished.

- Given the nascent state of public transfers in Korea, asset accumulation is the likely channel of retirement planning, meaning income alone does not provide a complete picture of old-age poverty.

- When incorporating both income and assets into the analysis, the old-age poverty rate determined by asset incomization is markedly lower than that derived from income alone but remains elevated.

- Korea’s old-age poverty rate, evaluated using both income and assets, still ranks among the highest in the world.

- When incorporating assets into the analysis, the share of the low-income, low-asset varies significantly across generations, particularly among those born in the 1940s and earlier.

- The difference in levels of old-age poverty across generations can be attributed to the intergenerational income disparity caused by rapid economic growth and the differing maturity levels of retirement security systems for each generation.

- To provide targeted assistance for the most vulnerable, the Basic Pension should be based on asset-adjusted pensionable earnings, reducing the support for seniors in the low-income, high-asset category.

Summary

KDI FOCUS Addressing the Prolonged Pension Gap

As the age for National Pension eligibility rises, creating an income gap, many older people typically offset this by increasing their labor earnings, studies suggest. Those facing a pension gap tend to increase earnings without an accompanying rise in poverty or reduction in consumption. However, households with excessive medical expenses struggle to fully offset the reduced pension, as increased labor income doesn't completely make up for the pension shortfall. Given the ongoing upward trajectory of the pensionable age, meticulous monitoring of elderly employment trends and bolstering support for prolonged employment are of paramount importance. For immediate relief, older households, constricted by caregiving obligations and facing labor supply limitations, require further reinforcement through targeted support programs.

- Increasing the National Pension eligibility age can bolster the fund's financial viability. However, without adequate income supplementation during the pension gap, this change may potentially escalate poverty rates and diminish the quality of life among older individuals.

- The goal of raising the pensionable age is twofold: to reduce long-term pension benefit expenditures by postponing the commencement of pension benefits, and to encourage labor market participation among the elderly.

- In response to the extended pension gap, pensioners supplemented their income through work. Consequently, no significant changes were observed in either the average household income or poverty rates.

- The increase in pensionable age has not significantly impacted household consumption expenditures.

- Households with medical expenses exceeding the median level struggled to counterbalance the decline in public pension income. They faced constraints in amplifying their labor income during the pension gap period.

- Generations impacted by the elevated pensionable age have navigated the pension gap by boosting their labor earnings, compared to unaffected cohorts. Consequently, no alterations were observed in their poverty rate or consumption expenditures.

- Continual monitoring of employment trends among the elderly, alongside the enhancement of employment extension support and reemployment services for middle-aged and senior populations, is crucial given the anticipated future extension of the pension gap.

- The promotion of a phased retirement system, linked to a partial pension scheme, is essential for encouraging long-term employment.

- Efforts must be made to address deficiencies in the disability pension system in order to strengthen income supplementation for individuals unable to work due to injury or illness.

- Appropriate care services should be provided for elderly households facing significant caregiving burdens for sick household members.

Summary

Research Monograph KOR Providing Social Protection for Self-Employed Workers

This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Summary

Policy Study KOR The Impact of Increase in Pension Age on Employment, Income and Consumption

Due to population aging and a relatively low contribution rate relative to high pension payments, a pension fund in Korea is financially unstable. To improve financial stability, the Korean government passed a law in 1998 that gradually increased the pension age from age 60 to 65 between 2013 and 2033. The purpose of the reform was to prolong the retirement age and delay the pension payment among the elderly. However, as the statutory retirement age has remained at age 60 since 2016, the gap between the statutory retirement age and pension age has widened. This widening gap has brought the need to explore whether and how people have been supplementing their income and consumption in the time of income crevasse.

This paper uses cohort discontinuity regression to estimate the impact of the increase in the pension age on employment, income, and consumption in Korea by using a discontinuous jump in the pension age from 61 to 62 between the 1956 and 1957 cohorts. It finds that an increase in pension age from 61 to 62 leads to a rise in labor income and does not lead to a drop in disposable income and consumption at age 61, despite the decrease in pension amount. However, a heterogenous effect depends on the family characteristics, such as the rate of medical expense out of total consumption expenditure and the education level of the household head. In particular, the labor income of families with high rates of medical expense out of total consumption did not increase despite the decline in pension amount. Along with the decreased business and property income, they experience a drop in disposable income. Moreover, a family with a household head in high school but without a college degree does not increase the labor income. Along with the decline in business and property income, they experience a drop in disposable income and consumption.

These results suggest that the vulnerable group from the increase in pension age policy might be the family who can-not extends labor participation due to health problems or the care-giver burden of the family member with the health problem. Moreover, the vulnerable group from the increase in pension age in Korea might not be the lowest and highest education group but instead those in the middle.

This paper suggests the following policy implication. First, the government needs to provide an income supplement to those who can not extend their employment in the period of income crevasse due to health problems and provide care-giving service to those who can not participate in work due to the care-giving burden between the statutory and pension age. Secondly, the government might want to implement a partial pension system that allows receiving early pension partially, which gives more flexibility in combining work and pension. Thirdly, to reduce the gap between the statutory age and pension age, the government might want to gradually extend the re-employment system while transforming the seniority-based wage system into one that reflects the productivity and task of the person's job. Fourth, the government might want to enhance the job-training program for the elderly by evaluating the program's effectiveness and grasping the need of both the employer and employee's side.

Summary

Policy Study KOR Income Disparities and the Impact of COVID-19

This study analyzes trends in household income distribution in South Korea during the period encompassing the COVID-19 pandemic and the factors influencing the income disparities from two perspectives. First, it examines overall trajectories in household income distributions, focusing on underlying factors with persistent effects, such as population aging, reduction in household sizes, and increase in dual-income households―important household characteristics that influence these trends. Analysis of household income distribution trends through income quintile comparison reveals a widening income gap by market income criteria, notably driven by a decline in market income among lower-income brackets relative to middle and high-income brackets. Particularly, rapid aging and shrinking household size have significantly widened the income gap between the lower-income brackets and the wealthier ones. However, when changes in household characteristics are controlled, the market income gap shows a trend of narrowing. Additionally, the recent increase in the share of dual-income households among those headed by individuals aged 50 and older has markedly narrowed the income disparity based on market income. In contrast, the quintile share ratio based on disposable income has continued to decrease, with much smaller impacts observed from household characteristics, suggesting that income and expenses from public transfers have mitigated the growing income gap caused by changes in household characteristics.

Second, the impact of COVID-19 on income and consumption is investigated by income strata, identifying how the labor income shock during the COVID-19 crisis affected income inequality and the actual household economy. The findings indicate opposing trends in labor income among low-income households: during the crisis in 2020, the growth rate of labor income for low-income households significantly decreased compared to the pre-COVID-19 period, whereas in 2021, it increased substantially, exhibiting a clear recovery trend. The effects of government cash assistance on income, when combined with labor income, varied greatly depending on the nature of the support. Temporary support provided in 2020 in response to COVID-19 significantly compensated for the labor income shock, demonstrating its effectiveness. In contrast, traditional cash support, similarly evaluated in conjunction with labor income, did not significantly alter the outcomes compared to those based solely on labor income, indicating their limited capacity to address the economic difficulties caused by COVID-19. In addition, the analysis of the impact of income shocks on consumption reveals that in 2020, the overall rate of increase in consumer spending decreased significantly for both low and high-income households compared to the period before COVID-19, with different consumption items affected by income strata. The decline in consumption growth rate was particularly noticeable in food, education, and medical expenses for low-income households, and in entertainment, culture, and education expenses for high-income households. Despite the recovery in labor income observed in 2021, the decrease in the growth rates for entertainment, culture, and education expenses continued.

These findings suggest several policy implications. First, as the aging of the population structure intensifies, income disparities based on market income are likely to widen, underscoring the need for future interpretations of income disparity trends to consider these demographic changes. Second, as increasing employment within households represents a crucial pathway to mitigating income disparities, policy support is required to remove barriers to employment, especially in low-income households. Lastly, in response to unforeseen crises like the COVID-19 pandemic, as well as shifts in the labor market landscape, such as pandemic-accelerated technological advancements and climate changes, it is advisable to strengthen the counter-cyclical functions of social safety nets to effectively cope with economic difficulties.

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