Low Birthrate and Aging Population... South Korea's Public Welfare Expenditure Soars Dramatically

OECD Decline Since 2010 vs. Korea's Continuous Increase
Urgent Need for Sustainable Welfare Policy Alternatives

Photo by Asia Economy DB

[Asia Economy Reporter Han Ye-ju] With the increasing demand for public social welfare expenditure, there is a call for proactive alternatives that consider both growth and distribution to implement sustainable welfare policies.

The Korea Economic Research Institute (KERI) announced on the 22nd a report titled "Dead-end Fiscal Capacity, What Are Effective Public Social Welfare Expenditure Measures?" commissioned to Professor Lee Young-hwan of Keimyung University and Visiting Professor Choi Byung-il of Hankuk University of Foreign Studies.

According to the report, South Korea’s total fertility rate is 0.81, the lowest worldwide, and low birth rates and aging are progressing faster than in major OECD countries. Therefore, the burden of welfare expenditure in Korea is expected to continuously increase for the time being. Additionally, in the short term, due to the U.S. Federal Reserve’s interest rate hikes, the global real economy is in a downturn phase, and welfare expenditure is expected to rise due to income reductions.

While social welfare expenditure among major OECD member countries began to decline from 2010, Korea’s has steadily increased. This means that Korea’s public social welfare expenditure as a percentage of GDP (10.8%) being lower than the OECD average (19.9%) is not a reason for complacency. In particular, this study found that pension expenditures and health and medical expenditures, which have rapidly increased since 1990 and account for the largest share of Korea’s public social welfare spending, have negative effects on the real economy.

Professor Lee Young-hwan stated, "Compared to other OECD member countries, Korea has less experience with social welfare policies and has had relatively small-scale policies so far. Therefore, it is necessary to analyze the problems experienced by other member countries during their welfare policy implementation processes and readjust the direction of public social welfare policies." He added, "Especially since Korea is the country with the fastest aging population measured by the proportion of people aged 65 and over, reviewing the economic effectiveness and sustainability of elderly welfare policies is a prerequisite for current welfare policies."

The report conducted panel analysis based on public social welfare expenditure data from 36 OECD countries from 1985 to 2019 and analyzed the impact of social welfare policies in nine public social welfare expenditure areas (SOCX) classified by the OECD on the real economy.

The analysis confirmed that pension and medical expenditure, which account for the largest share of Korea’s public social welfare spending, negatively affect economic growth and productivity. Conversely, Active Labor Market Programs (ALMP), which encourage labor market participation of the economically active population, were found to have positive effects on economic growth and productivity improvement.

In models related to income inequality improvement, expenditures supporting vulnerable labor groups, family allowances, and Active Labor Market Programs were effective in income redistribution, whereas medical expenditures were found to exacerbate income inequality.

KERI explained that Active Labor Market Programs targeting the active senior population capable of economic activity could be a new alternative to overcome the limitations of existing welfare policies. Unlike consumption-oriented welfare policies such as medical care and income maintenance, which have been the mainstream for the elderly population, ALMPs have demonstrated effects not only on distribution but also on economic growth and productivity enhancement.

Professor Lee Young-hwan emphasized, "As average life expectancy increases recently, it has become increasingly necessary to consider the impact of welfare expenditure on economic growth and productivity." He added, "The Active Labor Market Policies confirmed to have such effects in this study should be expanded not only to younger generations but also to the active senior population."