KDI: Increased Life Expectancy Has Lowered Average Propensity to Consume

KDI analyzes decline in consumption due to rising life expectancy
Propensity to consume drops 3.6 percentage points over 20 years
Average retirement age unchanged despite longer lifespans, leading to higher savings
Super-aged population expected to boost consumption in the future

Over the past 20 years, the sharp increase in life expectancy has been analyzed as a factor that has contributed to a decline in the average propensity to consume. Despite the rise in life expectancy, there has been little change in the average age of retirement from one's main job during a lifetime. As a result, the tendency to save has increased, as people prepare for the higher likelihood of working in relatively low-income and unstable jobs after retirement.

On April 23, KDI published a report titled "The Impact of Demographic Factors on the Propensity to Consume and Its Implications." According to KDI, over the past 20 years (from 2004 to 2024), South Korea's average propensity to consume has fallen by 3.6 percentage points, a change attributed to demographic factors resulting from increased life expectancy. KDI found that for every one-year increase in life expectancy, the propensity to consume drops by 0.48 percentage points. Since South Korea's life expectancy increased by 6.5 years over the past 20 years, the decline in propensity to consume was analyzed to be around 3.1 percentage points.

Research Fellow Kim Miru stated, "Even if life expectancy increases by one year, for someone with about 10 years of remaining life, that's a 10% increase in their expected lifespan. However, for someone with 20 years left, the increase rate is only 5%. Therefore, under the same income constraints, the elderly are inevitably more likely to reduce their consumption than the younger population." KDI analyzed that, despite the increase in life expectancy, the average age at which people leave their main job (defined in the economically active population survey as the average age at which those aged 55 to 64 leave the job they held the longest) has not changed significantly over the past 20 years. This has led households to increase their tendency to save.

Meanwhile, KDI predicts that in the future, as the increase in life expectancy slows and the proportion of the super-aged population (those aged 75 and over) rises rapidly, the average propensity to consume will gradually rebound. This is because the increase in the proportion of the super-aged population (aged 75 and over) within the elderly population is the most important factor driving the rise in the average propensity to consume.

Research Fellow Kim said, "The super-aged group tends to have relatively low income but possesses assets accumulated over time. When they consume based on these assets, their consumption relative to income is high, so we can expect to see a higher propensity to consume." KDI forecasts that over the next 20 years, the increase in life expectancy will be about half of the previous period, at around 3.5 years. However, with the trend of low birth rates continuing and the proportion of the elderly population rising rapidly, the working-age population will shrink, causing the growth rate to fall further, while the propensity to consume is expected to gradually increase.