Release of medium-to-long term outlook on respective agenda based
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Public, Health and Welfare Economics


Longevity Risk in Korea

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  • Author CHOI. Yongok
  • Date 2016/08/11
  • Series No. KDI FOCUS No. 69, eng.
  • Language English
SUMMARY □ Korea’s unprecedented rapid growth in life expectancy at birth is mainly attributable to a decline in elderly mortality rates. Indeed, the unanticipated increase in life expectancy and elderly population could complicate the government’s long-term consolidation efforts and present a serious obstacle to formulating and streamlining policies. Accordingly, the next crucial step in the face of mounting longevity risk is to conduct preemptive research on Korea’s elderly mortality rates. The government must acknowledge the exposure to longevity risk and make every efforts to compile accurate data on life expectancy and population projections in order to build a consensus on the gravity of the impending risks and seek a solution which could include a fiscal automatic stabilizer.

- OECD statistics show that Korea’s life expectancy has risen at the fastest pace among member nations.

- It is highly likely that life expectancy estimates based on the period life table are underestimated compared to the actual average remaining life span.

- Although unexpected longevity is prevalent across the globe, in terms of magnitude, Korea will experience a much bigger shock than any other developed country.

- Despite reaching 80 years in 2008, Koreans’ life expectancy continues to rise.

- Analysis found that 80% of the increase in life expectancy after 2000 is attributed to the decrease in the mortality rates of those aged 50 years and over.

- The elderly population has been consistently underforecast by Statistics Korea.

- It has been found that the forecasting error for the 65 years and over population is approximately -10% on average in the previous population projections for for 15 years in the future.

- Projections that take into account the recent improvement in mortality rates find that the 65 years and over population will reach 21.34 million by 2060, 21.1% more than Statistics Korea’s estimates.

- Accurate population projections are particularly important as huge social welfare expenditure with regards to aging is expected in the decades ahead.

- Under-forecasting the elderly population could impose a serious obstacle to streamling existing policies by weakening the necessity to reform the social security system.

- Recognition and mitigation efforts to tackle longevity risk should be of the utmost urgency.

- Due to the consistently changing improvement patterns in Korea’s mortality rates, Lee-Carter type models, which assume a universal pattern for mortality rate improvements, may not be suitable.

- Longevity risk is an undiversifiable, systematic risk that cannot be shouldered by the government alone. The government should inform the public of the actual conditions of longevity risk, which would help to create an environment wherein economic agents can reach a consensus on burden-sharing.
KDI VOD Report
Life expectancy is on a rapid upward trajectory.

In Korea, life expectancy at birth has surged from 52.4 years in 1960 to 82.4 years in 2014, marking the fastest growth among OECD members.

The source of the increase can be found in falling mortality rates.
Also, the improvement patterns of the mortality rate has changed along with economic development.

For example, while improvements in life expectancy in the 1970 to 1985 period was mainly due to a decline in the mortality rate of children and the working-age population, after 2000, this shifted towards the elderly.

Since 2000, approximately 60% of the increase in Korea’s life expectancy is owed to the improved mortality rates of the 65 years and over population. However, a failure to accurately reflect this trend has led to the continued under-forecast of the elderly population. In an era of population aging, it is vital that precise estimates on the elderly population are obtained as they will have a direct impact on social welfare expenditure.

In recognition, this study examines the systematic under-forecast of the elderly population, and analyzes the fiscal implications of an unexpected increase in the elderly population for the government.
Additionally, suggestions on how to mitigate the longevity risks are presented.

First, lets look into the reasons behind the continued under-forecast of the elderly population.
For this, an analysis of the population projections for the last 20 years was conducted.
The results show that in all past projections, the 65 years and over population was under-forecast. What is more, these errors seem to worsen over time.

One reason for this is that,
the current mortality forecasting model used in Korea is unable to properly reflect the rapid changes in the elderly population.

Next, the impact on government balance sheets, of an unexpected increase in the elderly population was analyzed.
It was found that previous population projections for 15 years after the time of estimation, under-forecast the 65 years and over population by an average 10%.

Take the 2011 population projection, for example.
If there, indeed, was an underestimation of 10%,
there would be over 1 million more seniors in 2026 than the current estimates.

This implies that social welfare expenditure would also increase in proportion.
In order to determine the extent of the additional fiscal burden in the long-term,
a comparative analysis was conducted using the 2011 population projection and a population projection that reflects the recent improvements in mortality rates.

The results show that unexpected increases in the elderly population would drive up the debt-to-GDP ratio by 0.1% in 2020 and 2.8% in 2060.
A bigger issue is that as these figures accumulate over time, government finances will also deteriorate.

With regards to the national pension, in particular, three rounds of fiscal estimates were conducted.
In 2003, the 65 years and over population in 2050 was projected at 15.27 million. However, this figure changed to 16.15 million in 2008 and again, to 17.99 million in 2013.
This means that there is a discrepancy of a staggering 2.7 million between the first and third estimates. Moreover, this figure is expected to grow.

Accordingly, these results indicate that unexpected increases in the elderly population will entail much larger fiscal burdens.

The unprecedented rapid improvements in Korea’s elderly mortality rates have made preemptive research critical. In the face of longevity risk, recent efforts to establish fiscal guidelines and strengthen the management of social insurance including the enactment of the Fiscal Consolidation Act, etc. can be deemed as positive steps.

However, more efforts must be made to provide the public with accurate information. As of now, officially released information on life expectancy is based on the premise that the current mortality rates will continue to remain the same. They are also significantly lower than the actual average life span. As such, an environment where the public has access to accurate information on life expectancy must be established to enable them to prepare for the future.
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