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Increase in Life Expectancy: Macroeconomic Impact and Policy Implications

Kyooho Kwon, Fellow 2016/05/12
■ The rise in the savings rate caused by increased life expectancy could have ramifications for consumption in the short-run. But, in the long-run, it could help boost GDP growth by inducing capital accumulation and expanding the labor supply, eventually having a positive impact.

○ The phenomenon of falling propensity to consume must be construed in view of structural aspects; a rational decision made by economic agents to respond to longer longevity.

○ Increased life expectancy can cushion the slowdown in Korea’s potential growth rate in the long-run.

■ The above confirms that consumption-boosting measures should pay more attention to structural factors, even though private consumption has been relatively stagnant.

○ To turn increased savings into increased domestic investment, consideration must be given to achieving services industry improvements, decisive regulatory rationalization and a flexible labor market to enhance return on investments.

○ Above all, as longer longevity acts as an incentive for the middle-aged and seniors to participate in the labor market, more active reform of the labor market needs to be implemented to create sufficient labor demand that corresponds to the supply.

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