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The following OECD assessment and recommendations summarise Chapter 5 of the Economic survey of Korea published on 20 June 2007.
Future spending pressures are strong, notably for public social spending, in the context of rapid population ageing
The Vision 2030 plan projects that public social spending will rise from its current level of 6%, the lowest in the OECD area, to around the current OECD average of 21% by 2030. However, the authorities should be cautious in boosting social spending, as significant increases in expenditure in a number of countries have led to sharp hikes in the tax burden, with negative consequences for economic growth. Instead of setting an overall spending target, it would be better to focus on developing effective programmes in each area of social spending, as included in the Vision 2030 plan. In any case, it is clear that public social spending will have to rise during the coming decades given rapid population ageing. Indeed, the proportion of elderly in Korea’s population, currently the second lowest in the OECD area, is projected to be the fourth highest by 2050.
Gross public social spending is relatively low in Korea
As per cent of GDP
1. The OECD average does not include Hungary and the Slovak Republic due to insufficient data. The national data is converted to US dollars using 2003 PPP exchange rates.
Source: OECD, Social Expenditure Database, 1980 2003.
While policies to boost fertility and labour force participation rates may mitigate the impact of population ageing…
One factor driving ageing is the steep drop in the fertility rate from 4.5 in 1970 to 1.5 in 2000 and further to 1.08 in 2005, the lowest in the OECD area. Removing obstacles that appear to discourage having children, such as the high cost of education – which is cited as the major factor by families – may help reverse the decline in fertility. Easing the burden of education expenses would require reforming the education system to reduce reliance on private tutoring institutions and lower the out-of-pocket cost borne by families. It is also important to mitigate the impact of population ageing on the economy by raising the labour force participation rate. If participation rates remain at their current levels, the labour force would decline by 23% by mid century, thus increasing the burden of ageing. There is significant scope to increase the labour force participation rate of prime-age women, which is one of the lowest in the OECD area. One priority in this regard – ensuring an adequate supply of high quality childcare facilities – would also tend to raise fertility. The government plans to triple the proportion of children up to age five in public childcare facilities to 30%. However, a better approach would be to shift the focus from the public provision of childcare services to giving vouchers to families, thereby allowing more choice for parents and fostering competition among providers. This approach requires removing price ceilings on private-sector providers of childcare. Increased availability of childcare may have a limited impact on raising fertility and female labour force participation rates without the introduction of more family-friendly business practices that allow both parents to combine work and care commitments. Finally, the human capital of older workers should be better utilised by raising or eliminating mandatory retirement ages.
The fertility rate in Korea is the lowest in the OECD area
Children per woman
Source: D'Addio and Mira d'Ercole (2005).
… it is important to improve the public pension system…
Population ageing will have its greatest impact on the National Pension Scheme (NPS). Legislation to lower the replacement rate from 60% to 50% (for a worker with 40 years of contributions) while raising the contribution rate from 9% to 12.9%, which is expected to ensure the financial sustainability of the NPS through 2065, was rejected by the National Assembly. Moreover, there remain concerns about the coverage of the NPS, as the number of contributors has levelled off at one-third of the working-age population, well below most other OECD countries. Moreover, the average contribution period of beneficiaries – projected by the NPS at 17.6 years in 2030 – suggests that many elderly will receive small pension benefits. Consequently, the ability of the NPS to reduce the relative poverty rate for households with elderly persons – which was already estimated to be 39% in 2000 – is limited. The introduction of a means-tested benefit in 2008 that will be available to about 60% of the elderly is thus a step in the right direction although the benefit will be relatively small at 5% of the average wage.
… and expand the new means-tested benefit for elderly persons…
Given the difficulty experienced in broadening the coverage of the NPS and raising the level of contributions among the self-employed, increasing the means-tested benefit over time toward the minimum cost of living (20% of the average wage) and widening its coverage would help reduce poverty among those over 65. A significant expansion of the basic benefit would need to be accompanied by a scaling back of NPS benefits to limit the overall cost of providing for the elderly. In the meantime, it is essential that the means-tested social assistance programme be adequate to lower the relatively high incidence of poverty among the elderly. Finally, the public occupational pension schemes for the civil service, military and private-school teachers, which cover 6% of the population, should be reformed to reduce their reliance on government subsidies and to allow portability with the NPS.
… while developing the new company pension system
Public pension systems should be accompanied by more private saving to prepare for retirement. One key step is the 2005 decision to allow firms to replace the lump-sum retirement allowance with a company pension system. Employers and employees must agree on whether to introduce a defined benefit or a defined contribution system. Thus far, however, very few large companies have introduced pension systems under the new law, in part due to the difficulty in reaching agreement with workers on the type of system. Company pension systems based on defined contributions should be encouraged, in part to facilitate labour market mobility, while using the tax system to accelerate the phasing out of the lump-sum retirement allowance, which gives firms an incentive to retire older workers.
Other priorities include the reform of the healthcare system…
Population ageing will also put significant upward pressure on public healthcare expenditure, which is relatively low at 3% of GDP, with the private sector accounting for another 3%. The OECD projects that ageing and rising income will boost public healthcare spending alone to between 6% and 8% of GDP by 2050. While avoiding cuts in the co payment rates borne by patients will help limit the rise in public spending, adequate access to treatment for low-income persons and those with chronic illnesses should be ensured. Reforms to reduce healthcare spending are also needed. First, the unified National Health Insurance (NHI) should become a more effective purchaser of healthcare services. Second, payment systems other than the current fee-for-service approach should be adopted. Third, the framework for the provision of pharmaceuticals should be reformed to reduce their relatively large share in healthcare spending. Fourth, the authorities should allow a greater role for the private sector in healthcare. Allowing for-profit companies to own hospitals and permitting a larger role for private health insurance for services excluded from the NHI would increase the availability of higher quality services.
… and careful implementation of the long-term care insurance system
Developing long-term care facilities for the elderly will reduce the burden on the NHI, as well as on families, which provide most long-term care at present. Only 0.4% of the elderly received long-term care in institutions in 2004, well below the OECD average of 4.5%. The government is adding more than 1 000 long term care facilities between 2006 and 2008. As with childcare, however, it would be more efficient to give vouchers to families and rely on private-sector firms to supply long-term care, thus limiting public expenditure and providing more choice for consumers. The government plans to introduce a long-term care insurance system in 2008, with the contribution rate initially set at 0.1% of wage income and the number of beneficiaries limited to 1.7% of the elderly population. The experience of other OECD countries with similar insurance schemes demonstrates the importance of containing costs by favouring less expensive home-based care and limiting the level of care provided to those with mild disabilities.
While social assistance spending needs to increase given the rise in the rate of relative poverty…
Alleviating poverty is becoming an important issue as the rising trend is not limited to the elderly. The rate of relative poverty, defined as an income of less than one-half of the national median, rose significantly from 9% for the entire population in the mid 1990s to 13% in 2000, a rate well above the OECD average. Tax and social spending have only a modest impact on the poverty rate in Korea, as compared to other OECD countries, reflecting the still low level of social spending. At present, only 3% of the population receives social assistance through the National Basic Livelihood Security System, reflecting strict eligibility criteria, which include an asset test and the availability of support from family members. It is important that the coverage is broad enough to ensure that all households have income that at least reaches the minimum cost of living. The social assistance programme should be reformed by strengthening the work incentives of recipients.
… it is also important to address the fundamental cause of widening income inequality…
The necessary rise in social assistance spending would be limited by addressing the fundamental causes of poverty. One key factor is increasing income inequality, which is explained by the widening wage gap between large and small firms and labour market dualism. Indeed, the share of temporary workers rose from 17% of employees in 2001 to 29% in 2005, the second highest in the OECD area. There is a large wage gap: non-regular workers (a category that includes temporary workers) earned almost 40% less than regular workers in 2005, with productivity differences explaining only part of the gap. Lower wage costs encourage firms to hire non-regular workers and the cost advantage is magnified by the relatively low coverage of non-regular workers by social insurance programmes. While more than four fifths of regular workers are covered by worksite-based pension, health and employment insurance, two thirds of non-regular workers are not covered by any of these programmes, reflecting weak compliance with the law. This helps to explain why only one in four unemployed persons receives unemployment benefits. It is important to expand the coverage of work based social insurance programmes, in part to reduce the incentives to hire non regular workers.
… by reversing the rising trend in the share of non-regular workers
In addition to lower labour costs, firms hire non regular workers to achieve greater employment flexibility. Using non-regular workers helps companies achieve the optimal level of employment, given the difficulty of dismissing regular workers. The new labour law, which aims at ending discrimination against non-regular workers, should not be allowed to reduce overall employment. Reversing the rising share of non regular workers, while ensuring flexibility in the labour market, requires reducing employment protection for regular workers. In sum, it is essential to improve equity by reversing the trend to a dualistic labour market in which non-regular workers receive low wages in precarious jobs and limited coverage by the social safety net. This would also have positive implications for productivity growth, given that non-regular workers receive less training from firms.
How to obtain this publication
It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Korea 2007 is available from:
For further information please contact the Korea Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Randall Jones, Taesik Yoon and Tadashi Yokoyama under the supervision of Willi Leibfritz.