[Exclusive] Turning Away from 2030... Launch of Youth Income Deduction Long-Term Fund and 100,000 Won Increase in Military Savings Limit

Rising House Prices Under Moon Government Leave Youth Feeling 'Sudden Paupers' and Deprived
New 'Youth Income Deduction Long-term Fund' Established
Military Savings Limit Increased from 400,000 to 500,000 Won

[Asia Economy reporters Jang Sehee and Son Seonhee] The economic policy direction for the second half of this year (Hakyungbang) includes a large number of policies targeting youth, such as the youth income deduction long-term fund and the military savings plan, which is interpreted as an effort to appease the youth sentiment that has recently turned sharply against the ruling party. In particular, the rapid rise in housing prices during the Moon Jae-in administration has caused a self-deprecating sense of deprivation called ‘lightning poor’ among the 2030 generation who have just entered society. Moreover, as interest in Lee Jun-seok, the new leader of the People Power Party, has heated up, the ruling party judged that the sentiment of these generations has shifted. Song Young-gil, leader of the Democratic Party of Korea, recently defined it as an ‘era of youth disaster’ in a negotiation group leader’s speech and expressed his intention to strengthen related youth policies.

◆Supporting asset formation through fund tax benefits= According to related ministries such as the Ministry of Economy and Finance and the Financial Services Commission on the 17th, the core of the youth measures included in Hakyungbang is support for asset formation. The youth income deduction long-term fund is designed to provide income deduction benefits of up to 40% (maximum 4.8 million KRW) of the amount paid during year-end tax settlement. Given the booming stock market, the intention is to support youth in forming assets through long-term investment. A government official said, "We have decided to provide income deduction benefits for funds newly to support youth asset formation and long-term investment."

The eligible subscribers are limited to youth aged 19 to 39 with an annual total salary of 45 million KRW or less. Benefits are given to subscribers of installment-type funds who invest at least 40% of the payment, with an annual payment limit of 12 million KRW. For example, a youth with a total salary of 45 million KRW or less (taxable income tax rate bracket of 15%) can invest the maximum limit of 12 million KRW in the fund and receive an income deduction of 4.8 million KRW, resulting in a final income tax refund benefit of 792,000 KRW. When converted to bank deposit interest, this corresponds to about a 6.6% interest effect. However, the tax benefit is only available if subscribed for at least five years. Since the income deduction long-term fund requires investing at least 40% in domestic stocks, there is a risk of principal loss.

The government also implemented a similar income deduction long-term fund system for low- and middle-income groups in 2014. However, it abolished the system after two years when it launched the Individual Savings Account (ISA). The ISA allows multiple financial products such as deposits, funds, and derivative-linked securities to be held in one account, and at that time, it was judged that tax support by product or specific industry was overlapping as the ISA expanded the scope of individual tax benefits. However, this time, since the product is specialized for ‘youth,’ it is expected to serve as a catalyst to help youth asset formation and promote capital market activation.

◆Military savings plan expanded to 6% interest rate and 500,000 KRW limit= Along with this, the government decided to increase the maximum monthly payment limit for the military savings plan from 400,000 KRW to 500,000 KRW per individual. Eligible subscribers include active-duty soldiers, full-time reservists, conscripted police officers, maritime conscripted police officers, conscripted firefighters, and social service agents, with at least six months of remaining service period. The saving period ranges from a minimum of six months to a maximum of 24 months (limited to the mandatory service period), and subscribers receive up to 6% interest benefits. Currently, if a soldier serving an 18-month army service period deposits 500,000 KRW monthly, they can receive 9,427,500 KRW at maturity. As of May, the number of military savings plan subscribers reached 292,000, accounting for 88% of the total eligible population, making it a popular financial product. The intention is to expand the payment limit through this Hakyungbang to increase benefits.

In addition, the government plans to include housing-related policies such as youth savings accounts and youth monthly rent support measures in Hakyungbang. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, recently stated, "There is an opinion that budget support projects should be increased due to the growing difficulties of youth. We are continuously considering projects necessary for asset formation of the younger generation," which a government official explained as the background of this consideration.

However, some criticize that such moves by the ruling party and government could be seen as ‘populist policies’ aimed at gaining support from the 2030 generation ahead of the next presidential election, which is less than a year away. Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "While youth asset formation is important, the core is job creation," and added, "Comprehensive measures on jobs and housing need to be additionally prepared."

The government also plans to announce a comprehensive youth support plan in July. The plan is expected to include youth housing supply, youth monthly rent support, and youth digital job supply.