National Debt-to-GDP Ratio Could Reach 173% in 40 Years... Fiscal Pressure from Low Birth Rate and Aging Population

National Debt-to-GDP Ratio Could Reach 173.4% by 2065
Aging Population and Low Birth Rates Drive Surge in Mandatory Spending
Government Emphasizes Need for Structural Reforms and Policy Innovation

There is a projection that South Korea's national debt-to-GDP ratio could soar to as high as 173.4% by 2065. It was analyzed that fiscal soundness could be severely undermined as mandatory expenditures increase due to low birth rates and an aging population, and as economic growth slows down.

The Ministry of Economy and Finance announced on September 3 that it had submitted the results of the "3rd Long-Term Fiscal Outlook (2025-2065)" to the National Assembly in accordance with the National Fiscal Act. The long-term fiscal outlook is conducted every five years by the Ministry based on the National Fiscal Act. Its purpose is not simply to predict future national debt, but to alert the public to fiscal risks that may arise if the current system is maintained.

This is the third such outlook, following previous reports in 2015 and 2020. The Ministry explained that it enhanced the objectivity and reliability of the results by reflecting recent demographic changes and growth forecasts, and by utilizing forecasting methodologies from both domestic and international institutions, including the Korea Development Institute (KDI), the National Assembly Budget Office (NABO), and the U.S. Congressional Budget Office (CBO).

First, based on assumptions regarding population and growth levels, this long-term fiscal outlook analyzed five scenarios: the baseline scenario (medium population, neutral growth), population improvement (high population, neutral growth), population deterioration (low population, neutral growth), growth improvement (medium population, optimistic growth), and growth deterioration (medium population, pessimistic growth). Depending on changes in assumptions such as birth rate and growth rate, the national debt-to-GDP ratio is projected to vary significantly, from 133.0% up to a maximum of 173.4%.

According to the baseline scenario, if the current system and policies continue without change, the national debt-to-GDP ratio will rise to 156.3% by 2065. This is similar to existing projections from NABO (173.0% in 2072) and KDI (144.8% in 2060). More specifically, the ratio is expected to reach 71.5% in 2035, 97.4% in 2045, and 126.3% in 2055. Under the population improvement scenario, which assumes an improved birth rate, the ratio is projected at 144.7%, while under the population deterioration scenario, which assumes a worsening low birth rate, it is projected at 169.6%. In addition, depending on macroeconomic variables, the ratio is expected to be 133.0% under the growth improvement scenario and 173.4% under the growth deterioration scenario.

The government also conducted a sensitivity analysis regarding expenditure reduction. The analysis found that if the increase in both discretionary and mandatory expenditures is gradually reduced over 20 years, the national debt-to-GDP ratio can be significantly lowered. If discretionary spending is reduced by 5%, the ratio is projected to be 150.3% in 2065; if reduced by 15%, it is projected to be 138.6%. For mandatory spending, a 5% reduction would bring the ratio to 138.7%, and a 15% reduction would lower it to 105.4%.

The effect of restructuring mandatory expenditures (such as pensions and health insurance) is expected to be much greater than that of reducing discretionary spending. The government emphasized, "If small changes in variables accumulate over a long period, the fiscal outlook can change dramatically," and added, "Depending on policy responses, the trajectory of national debt growth can be sufficiently modified."

The main factors behind the increase in the national debt-to-GDP ratio were identified as the rise in mandatory expenditures due to low birth rates and an aging population, as well as slowing economic growth. Compared to this year, the proportion of people aged 65 and older is projected to more than double by 2065 (from 20.3% to 46.6%), while the working-age population (ages 15-64) will shrink from 35.91 million to 18.64 million. As a result, the ratio of mandatory expenditures to GDP is expected to rise from 13.7% this year to 23.3% in 2065. Among the four major public pensions, the National Pension is expected to turn to a deficit in 2048 and exhaust its fund in 2064, while the Private School Teachers' Pension is projected to turn to a deficit in 2026 and deplete its fund in 2047.

Health insurance is projected to turn to a deficit in 2026 and exhaust its reserves in 2033, while the Long-term Care Insurance for the Elderly is expected to turn to a deficit in 2026 and exhaust its reserves in 2030. Discretionary spending is projected to converge to 11.5% of GDP over five years after 2029 and to remain at 11.5% after 2034.

The managed fiscal balance, which shows the actual fiscal condition by excluding the balances of the four major social security funds (including the National Pension) from the consolidated fiscal balance (total revenue minus total expenditure), is projected to increase from a deficit of 4.2% this year to 5.9% in 2065. This is nearly twice the fiscal rule that aims to keep the managed fiscal deficit within 3% of GDP.

The government stated that since it is difficult to assess the medium- to long-term fiscal sustainability based solely on the national debt-to-GDP ratio, it plans to develop supplementary indicators that reflect various factors such as climate change, extended retirement age, and economic downturn. The government also plans to focus on boosting the growth rate by utilizing all available policy tools, including the major transition to artificial intelligence (AI), as fiscal conditions could improve significantly over the next 40 years through additional efforts such as expenditure restructuring and innovative policies.