Population Aging, Fiscal Policies, and National Saving: Predictions for Korean Economy

Abstract

This paper evaluates the effects of population aging and fiscal policies on national saving in Korean situation. For the prediction of the national savings rate of Korea for the next several decades, we employ a life-cycle model, which incorporates the generational accounting approach needed to assess the distribution of fiscal burden across generations. We found that the rapid population aging and long-term budgetary imbalance will substantially lower the national savings rate in Korea. A sensitivity analysis based on an alternative model, an altruistic family model, shows that these predictions are robust to the specification of altruism among generations. In addition, the estimation results of consumption functions with respect to various kinds of wealth suggest that the annuitization of wealth due to maturing of public pensions and introduction of reverse annuity mortgage is likely to further decrease the savings rate in the future.

Nonlinear effects of fiscal policy on national saving

“…Deficit in government budget balance leads to an increase in private saving, but the increase is less than the deficit and thus national saving falls. Chun (2007) comes to the conclusion that the increasing aging speed of the population and government budget imbalance in long-term lower the national saving ratio in Korea. In another study, Barrell and Weale (2010) show that the authority can affect the low saving rate in England through the conduct of fiscal policy, transfers and real estate's prices.…”