Rising Life Expectancy Promotes Asset Accumulation
...Driving Growth in Household Debt
A recent study has found that the steady increase in household debt in South Korea over the past two decades has been driven by a stronger motivation to accumulate assets due to rising life expectancy. The report explains that older adults have accumulated financial assets to prepare for retirement, while younger and middle-aged adults have borrowed funds mainly to acquire housing assets, resulting in an expansion of household debt.
The Korea Development Institute (KDI), in its report "The Impact of Demographic Changes on Household Debt" released on August 5, projected that the household debt ratio is likely to enter a downward trend as population aging accelerates in the future. Kim Miru, a research fellow at KDI, stated, "The long-term increase in household debt appears to be driven more by structural factors than by economic cycles," adding, "Rising life expectancy has promoted asset accumulation, and the intergenerational flow of funds has led to increased debt."
On the 6th, elderly people are engaged in craft activities at the Gireum Daycare Center in Seongbuk-gu, Seoul. The daycare center, commonly called "Nochwon" (Senior + Kindergarten), is a facility that cares for the elderly who are not severe enough to require nursing homes but have difficulty with daily life due to early dementia or other age-related diseases (long-term care grades 1 to 5). Photo by Kang Jinhyung
Rising Life Expectancy Boosts Demand for Asset Accumulation... Leading to Increased Debt
Since the late 1990s, the ratio of household debt to GDP in South Korea has steadily increased without significant fluctuations. As of the first quarter of 2025, the ratio stands at 90.3%, which is among the highest in the world except for a few countries such as Switzerland (125.8%). During the same period, real interest rates have declined, indicating that the supply of funds has increased more than the demand.
KDI identified "rising life expectancy" as a key factor behind the expanded supply of funds. As life expectancy has increased, households have sought to accumulate assets for retirement. In this process, older adults have focused on financial assets, while younger and middle-aged adults have concentrated on housing assets, leading to increased debt. A comparison of asset structures by age group between 2014 and 2024 shows that older adults have seen increases in both net assets and net financial assets, whereas younger and middle-aged adults have increased their net assets but experienced a decrease in net financial assets after accounting for debt. This demonstrates a structure in which older adults supply funds and younger and middle-aged adults borrow them.
"Household Debt Decreases as Youth Population Shrinks and Older Population Grows"
The report also analyzed that changes in the population composition by age group affect household debt trends. Household income changes throughout the life cycle: younger and middle-aged adults increase borrowing to bring forward future income, while older adults spend more on consumption. Consequently, a higher proportion of younger and middle-aged adults in the population leads to increased household debt, whereas a higher proportion of older adults tends to reduce debt.
Based on an empirical analysis using long-term panel data from 35 countries, including those in the Organisation for Economic Co-operation and Development (OECD), KDI found that a one-year increase in life expectancy raises the household debt-to-GDP ratio by about 4.6 percentage points. If the proportion of younger and middle-aged adults (ages 25?44) decreases by 1 percentage point and the proportion of older adults (65 and above) increases by 1 percentage point, the household debt ratio drops by approximately 1.8 percentage points.
The report stated, "Of the increase in the household debt ratio over the past 20 years, 28.6 percentage points can be attributed to rising life expectancy, and 4.0 percentage points to demographic changes." In contrast, the impact of the net asset Gini coefficient (asset inequality) was limited to 1.0 percentage point, and financial soundness regulations contributed -2.3 percentage points.
"Household Debt Will Naturally Decline... Structural Approach Needed Over Aggregate Controls"
The report predicted that, reflecting these demographic changes, the household debt ratio will peak within a few years and then enter a downward trend. According to Statistics Korea's future population projections, life expectancy will increase by 6.4 years by 2070, but demographic changes due to aging will act to lower the household debt ratio by 57.1 percentage points. As a result, by 2070, the household debt ratio is expected to be about 27.6 percentage points lower than the current level.
Research fellow Kim emphasized, "Future household debt policy should be designed to focus on repayment ability, reflecting structural trends, rather than managing to an arbitrary aggregate target." He added, "As long as the financial market functions normally, the approach should prioritize macroprudential soundness of financial institutions and assessment of borrowers' repayment ability, rather than excessively restricting the flow of funds."
Reduction of DSR Exceptions and Labor Market Flexibility Also Cited as Policy Tasks
The report also raised the need to reduce exceptions in the operation of the DSR (Debt Service Ratio) system. Currently, the application of DSR is relaxed or excluded for certain financial products, such as policy mortgages or Jeonse loans, resulting in loans being issued regardless of repayment ability.
KDI stated, "DSR exceptions may help vulnerable groups access funds in the short term, but in the long term, they risk undermining the effectiveness of the system and distorting the market's risk assessment function." The institute recommended establishing strict repayment ability assessment standards even when exceptions are granted and adopting a risk-based differentiated application system.
Excessive supply of policy finance was also identified as a factor in the expansion of debt. The report noted that excessively high guarantee ratios and low guarantee fees can lead to inefficient fund allocation, emphasizing the need to introduce appropriate guarantee fees and risk-based assessment systems for all but the most vulnerable social groups.
From the perspective of the labor market, the report highlighted the need to shift from a seniority-based wage structure to a more flexible, job- and performance-based wage system. It pointed out that while retirement ages have stagnated, life expectancy continues to rise, increasing the pressure on older adults to accumulate assets. The report concluded that easing labor market rigidity could also help slow the growth of household debt.
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