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Causes and Characteristics of Population Aging

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Causes and Characteristics of Population Aging Causes and Characteristics of Population Aging : Evidence from Korea among OECD Countries* Kyounghoon Park** May 2018 The contents of this paper represent the personal opinions of the author and do not necessarily reflect the official view of the Bank of Korea. Any report/citation of this paper should specify the name of the author. * This version is built upon the published paper in the Bank of Korea Monthly Bulletin (June 2017), The Effect of Population Aging and the Policy Challenge: ChapterⅡ-1 (September 2017) in Korean, and in the Bank of Korea Quarterly Bulletin (September 2017) in English. ** Economist, Macroeconomic and Fiscal Research Team, Research Department, Bank of Korea (Tel: +82-2-759-4427, Email: [email protected]) The author would like to express gratitude to Deputy Director Jaerang Lee of the Bank of Korea Economic Research Institute (BOKERI) and Hwankoo Kang, head of the Financial and Monetary Economics Team at the Bank of Korea (BOK), both of whom were of great help in writing this paper. The author would also like to thank Professor Jinill Kim of Korea University, Director Jong Ku Kang at the BOK, Senior economist Kiho Kim of the Macroeconomics Team at the BOK, Economist Sungyub Chung of the Industry and Labor Research Team of the Research Department at the BOK (who provided useful comments), Research associate Junseok Park (who assisted in classifying the materials), participants of the BOKERI’s seminars and the bilateral meeting of the BOK and the Deutsche Bundesbank, and anonymous reviewers. The author claims full responsibility for any errors or mistakes that remain in this paper. Causes and Characteristics of Population Aging : Evidence from Korea among OECD Countries Abstract Korea’s level of population aging remains lower than the OECD average. However, the pace of population aging in Korea is faster than that of many other member countries, as its total fertility rate is the lowest among OECD countries while its life expectancy exceeds the OECD average. Using panel data from OECD member countries, we categorize the common causes of population aging in OECD countries into declining fertility rate and increasing life expectancy, and analyze these causes of aging mainly in terms of factors influencing the declining fertility rate. We find that declines in fertility rate are attributable mainly to socioeconomic factors, including wedding and childcare expenses and labor market conditions that limit the division of labor in housework, and sociocultural factors, such as changes in education levels and gender equality. Increases in life expectancy are found to be positively correlated to welfare policies and income levels. Next we compare descriptively the characteristics of population aging in Korea with those in major countries. As Korea industrialized rapidly, the aging of its population has progressed rapidly as well. The factors driving this rapid aging include: historical characteristics, such as the decline in potential fertility, caused in part by Korea’s birth control policy; sociocultural characteristics, such as the decline in the fertility rate due to high wedding and childcare expenses, emergence of an environment in which it is difficult to achieve work-family balance, and gender inequality in the division of labor in housework; and demographic characteristics, such as the surge in the proportion of elderly people as the baby boomers age. To cope with this aging, policies are urgently needed to help ease the burdens of wedding and childcare expenses, for example by stabilizing the housing market and, reducing private education expenses, and create working conditions that ensure work-family balance and gender equality in the division of labor in housework. More fundamentally, it is necessary to establish social consensus on the need for a gender-equal society. As the recovery of fertility rates and slowing of the pace of population aging take place over several generations, policies aimed at achieving these goals should be implemented consistently and continuously based on a long-term perspective and in conjunction with policies that aim to improve education and employment conditions for young people. Finally, to address poverty among the elderly, comprehensive measures such as elderly employment policies, pension schemes and welfare systems will be important policy tasks going forward. Key words: population aging, declining fertility rates, life expectancy JEL classification: J10, J13, J14 I. Introduction Population aging refers to a demographic phenomenon in which simultaneously declining fertility and mortality rates cause the proportion of elderly citizens in a population to rise, ultimately leading to population decline. Statistics Korea announced the median values of its population estimates in 2006, 2011, and 2016, which showed that after peaking sometime around 2030, Korea’s population would begin decreasing. Population estimates are adjusted every five years within the scopes of low- and high-value scenarios. Overall, population estimates have been adjusted upward slightly based on median value scenarios. These adjustments are attributable largely to prediction errors, but are also partly attributable to the influx of foreign workers and the effects of the population policies 1 that have been implemented every time the population estimates are announced (Refer to Figures 1 and 2). Figure 1. Population Estimate Trends in Korea1) Note: 1) Based on median values of population estimates made in 2006, 2011, and 2016 Source: Statistics Korea, Future Population Estimates 1 This natural population increase is a result of the weakening effects of the birth control policies that were implemented from the 1960s to 1990s but abolished in the 2000s. Korea’s birth control policies are explained in detail in Chapter IV. Figure 2. Population Estimate Trends in Korea1) Note: 1) Comparison of population estimates made for a period between 2005 and 2030, based on median values of population estimates made in 2006, 2011, and 2016 Source: Statistics Korea, Future Population Estimates Economically, on the other hand, population aging causes the working age population to shrink, which in turn leads to declines in labor supply. In addition, the average propensity to consume of the elderly, whose proportion of the population is increasing, may change consumption patterns and affect total savings and investment. According to the future population estimates announced by Statistics Korea, people aged 65 or above accounted for 12.8% of Korea’s total population as of 2015, and that proportion is expected to reach 28.7% by 2035 and 42.5% by 2065, growing to take up nearly half the entire population (Refer to Figure 3). Figure 3. Korea’s Elderly Population and Its Share of the Total Population1) Panel A. Elderly Population,2) 1965-2065 Panel B. Its Share of the Total Population,3) 1965-2065 Note: 1) Based on median values of population estimates made in 2006, 2011, and 2016 Source: Statistics Korea, Future Population Estimates Accordingly, the working age population aged 15 to 64 peaked in 2016, but is expected to decline rapidly at an average rate of more than 300,000 people per year until it reaches 20.62 million, which is 55.1% of the size of the working age population in 2015. The working age population’s proportion of the entire population was 73.4% in 2015, but is expected to fall to 60% by 2035 and 47.9% by 2065, accounting for slightly less than half the total population. By age bracket, the proportion of the working age population aged 25 to 49 will drop from 52.8% in 2015 to 49.2% in 2065, while the share of the working age population aged 50 to 64 will rise from 29.1% to 36% over the same period (Refer to Figure 4). Figure 4. Size and Structure of Korea’s Working Age Population1) Panel A. Working Age Population, 1965-2065 Panel B. Structure of Working Age Population,2) 1965-2065 Notes: 1) Based on 2016 median value estimate 2) Proportions of working age population aged 25 to 49 and 50 to 64 to the working age population aged 15-64 Source: Statistics Korea, Future Population Estimates If the above projections are true, a declining working age population would lead to decreases in savings and investment, which would in turn reduce Korea’s economic growth potential in the long run (Kim, 2016; IMF, 2004).2 Furthermore, as the declining working age population erodes the government’s tax revenue, the government will be forced to increase its public expenditures for such as pensions and medical costs, resulting in the deterioration of the government’s fiscal soundness. These trends will make it difficult for the government to maintain balanced budgets for family and child support programs and may increase inter- generational income transfers between the younger and older generations. Considering the problems posed by these demographic changes, we need to gain an overall understanding of the causes and characteristics of population aging and establish fundamental countermeasures for addressing them. Studies on the causes of population aging and countermeasures for addressing them have been carried out for quite some time already. This study aims to promote a comprehensive understanding of the causes and characteristics of population aging and suggest implications for the development of countermeasures by first reviewing related literature and addressing matters that such studies have not dealt with. First, we added the gender division of labor in housework to the explanatory variables used in existing studies, in consideration of the rising labor force participation rate of women, and analyzed its impacts on fertility rates through its interaction with the working hours of men. We also examined the impacts gender income disparity would have on fertility rates based on the assumption that the education levels of women will continue to rise. 2 However, a recently released study (Acemoglu and Restrepo, 2017) argues that population aging would not necessarily reduce labor supply, savings and investment, and would thus not degrade economic growth potential.
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