[Seungseop Song's Financial Light] Financial 'It' Items of the 70s and 80s... What is Jaehyeong Savings?

Government Provides Asset-Building Opportunities for Working and Middle Classes
Half of Workers Drawn to Interest Rates Over 20%
Long Maturities and Growing Fiscal Burden Lead to Gradual Disappearance

Finance is difficult. It is filled with confusing terms and complicated backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even if you know nothing about finance, we light the ‘fire’ of financial understanding with ‘light’ stories that you can immediately grasp.

Savings-type Jaehyung Savings. Photo by Asia Economy DB

[Asia Economy Reporter Song Seungseop] What do you think is the best means of increasing financial assets? Special savings or time deposits? Stocks or funds? From the 1970s to the 1990s, the trend was ‘Jaehyeong Savings.’ What was it about Jaehyeong Savings that captured the hearts of financial consumers?

Jaehyeong Savings is short for ‘Geunroja Jaesanhyeongseong Jeochuk’ (Worker’s Asset Formation Savings). It was created to provide opportunities for asset formation to the working class and middle class. The interest rates were higher than products offered by private banks, and it even had tax-exempt benefits, making it very advantageous for subscribers. Because the subscription period was long, a lump sum accumulated, so the amount received at maturity was substantial.

Jaehyeong Savings started in 1976. At that time, the government wanted to encourage workers’ savings to expand the middle class and successfully establish the Saemaul Undong (New Village Movement). After Japan’s Jaehyeong Savings policy succeeded in 1972, Korea benchmarked it. According to various records, the interest rate at introduction was up to 26% per year. After accepting subscribers for three years, as many as half of all workers joined.

In the 1980s, Jaehyeong Savings remained popular. The eligible subscribers expanded from those earning less than 250,000 won per month to those earning less than 600,000 won. Although interest rates gradually began to decline, rates approaching 15-20% were still attractive. For young workers at the time, Jaehyeong Savings was considered an essential financial product that they had to subscribe to.

Jaehyeong Savings Faded Due to Long Maturity and Fiscal Burden

The popularity of Jaehyeong Savings began to fade from the 1990s. As national income increased significantly, the number of people wishing to subscribe decreased sharply. The drawback of having a long maturity period that locked up lump sums also gained attention. If the maturity was not reached, the high interest could not be received. The government also judged that the savings incentives paid to Jaehyeong Savings subscribers were a fiscal burden and abolished them in 1995.

Jaehyeong Savings, which had disappeared, reappeared in 2013 under the Park Geun-hye administration after 18 years. The reason was to ‘help workers prepare lump sums.’ The eligibility was greatly expanded to those earning less than 50 million won annually. The maturity was seven years, and because it was Jaehyeong Savings, it had tax-exempt benefits. For the first 3-4 years, fixed interest rates were applied, followed by variable interest rates applied annually. Usually, interest benefits of 4-4.6% per year were given, and on the first day of launch, sales approached 20 billion won, showing great popularity.

Jaehyeong Savings was also a card considered by former Gyeonggi Province Governor Lee Jae-myung when he was the Democratic Party’s presidential candidate last February. At that time, Lee’s camp looked into adding Jaehyeong Savings functions to the youth subscription savings account. During the campaign, he said, “The Youth Hope Savings helped prepare lump sums, and it was overcrowded, but the amount and support were too small,” and “If we support a little interest like Jaehyeong Savings and provide government subsidies, young people can have hope and prepare lump sums.”

The survey of demand for the Youth Hope Savings, which was wildly popular, was also based on Jaehyeong Savings subscribers. The Financial Services Commission predicted the number of accounts eligible for savings incentives for Youth Hope Savings to be 380,000. The basis was the estimated scale of youth accounts for Jaehyeong Savings products operated by banks from 2013 to 2015. According to the industry, the actual number of Youth Hope Savings subscribers is known to have reached 2.9 million.