KDI Korea Development Institute

Summary

Policy Study KOR A Study on Property Tax Incidence

This study examines the incidence of property taxes, focusing on whether the property tax, which is levied on the property owner when the owner and the user are different, is passed on to the user. If the tax is borne by the owner, it acts as a capital tax; if passed to the user, it functions as a consumption tax. Additionally, if the revenue from the tax is used to improve local environments, it could be considered a benefit tax.

Through empirical analysis, the study explores how changes in the comprehensive property tax system affect housing rental prices. The findings show that these changes have little impact on the rental market. No evidence was found to suggest that rental prices increase as the publicly assessed value rises near the taxable threshold. Moreover, using a difference-in-differences method to compare rental prices before and after the policy change, the analysis confirms that the strengthened system did not lead to higher rental prices for properties subject to the tax.

In conclusion, the results suggest that the tax is best viewed as a capital tax. Taxing housing assets may reduce investment and hinder the efficient allocation of capital. Since South Korea's property tax level is in line with the OECD average, it is important to minimize changes to the system, analyze its effects, and then proceed with reforms.

Summary

Policy Study KOR Economic Effects of Capital Gains Tax on Housing

This study examines the economic effects of South Korea’s capital gains tax reforms on housing, focusing on the lock-in effect ― a contraction in housing transactions following higher tax rates. In 2017, amid a prolonged housing boom, the government raised capital gains tax rates for multi-homeowners. Analysis of transaction volumes and prices around the announcement and implementation reveals a pre-reform surge in sales and gifts, followed by a post-reform decline. A temporary suspension of the tax in 2019 again triggered a short-term uptick in transactions during the grace period.

These findings suggest the tax policy failed to achieve its intended goal of stabilizing the housing market. The lock-in effect, compounded by low policy credibility, likely contributed to diminished public trust in housing policy. Moving forward, housing tax reforms should be anchored to fundamental taxation principles, prioritizing efficiency and equity while promoting system stability to ensure predictable obligations for taxpayers and bolster confidence in the housing market.

Summary

Research Monograph KOR Empirical Study on the Growth of Korea’s Cultural Content Industry and Policy Implications

This study conducts a comprehensive analysis of the growth dynamics of South Korea's cultural content industry to enhance its competitiveness and support sustainable development. Employing a multifaceted empirical approach, it examines quantitative metrics―such as the number of businesses, employment levels, revenue, and trade flows―across the industry and its subsectors to identify growth trajectories and structural characteristics (Chapters 3 and 4).

Given the industry's complex interdependence with other sectors, this study combines data from the "Special Classification of the Content Industry" (Statistics Korea, Ministry of Culture, Sports and Tourism), the "Korean Standard Industrial Classification (KSIC)" (Statistics Korea), and the "Input-Output Tables" (Bank of Korea). This integration creates a new input-output table that captures 12 subsectors of the cultural content industry (Chapter 5).

The study uses the new input-output table to examine supply, demand, and input structures to illuminate the industry's economic roles and inter-industry linkages. Key metrics―including total output ratio, import dependency, intermediate input structure, and value-added ratio―are compared with other sectors to highlight the distinctive characteristics (Chapter 6). The study further investigates the sector's effects on the broader economy, calculating coefficients for input, production induction, and sensitivity, assessing the sector's overall impact via inter-industry ties and interactions (Chapter 7).

In recognition that individual businesses drive the industry's growth, this study identifies business growth enablers within the CPND framework (Content, Platform, Network, and Device). They include intellectual property ownership, workforce size, operational tenure, market diversification, and digital infrastructure. This analysis highlights the critical impact of IP rights―especially utility patents and copyrights―on competitiveness and revenue growth (Chapter 8).

Moreover, the study systematically evaluates relevant policies through a descriptive statistical analysis of 149 support programs managed by the Ministry of Culture, Sports and Tourism and the Korea Creative Content Agency (KOCCA), focusing on their primary functions and target groups (Chapter 9). Finally, building on the study's findings, key policy directions are proposed: fostering digital adaptability among small and medium-sized enterprises (SMEs), enhancing IP protection in the digital era, diversifying export markets, and addressing regional disparities to ensure balanced development across Korea (Chapters 10).

Summary

Policy Study KOR Capital Flows and Challenges in the Digital Age: Focusing on Central Bank Digital Currencies (CBDCs)

As the digitalization of finance accelerates, discussions on the adoption of Central Bank Digital Currencies (CBDCs) are gaining momentum, particularly among G20 nations. This development calls for examining the potential impacts of CBDC implementation on both domestic and international financial markets and capital flow, alongside exploring appropriate response strategies. Upon reviewing the status and background of CBDC adoption among G20 countries, setting up a unified CBDC platform for this group in the short term is highly unfeasible. Instead, some emerging economies are expected to introduce retail CBDCs to enhance payment infrastructure or conduct experiments linking wholesale CBDCs for cross-border payments. Should CBDCs be adopted globally, the speed and scale of international capital movements could increase, potentially amplifying the volatility of capital flows and currency values. In order to ensure the effectiveness of capital flow management policies already in place, it is crucial to foster close cooperation between major central banks on CBDC integration. Moreover, efforts should be made to maximize the benefits of the new payment systems introduced by CBDCs. These efforts include revising financial regulations and upgrading infrastructure by implementing open foreign exchange regulations, maintaining balanced oversight of fintech firms, and enhancing the efficiency of existing payment and settlement infrastructures.

Summary

Policy Study KOR Tax Revenue Structures in an Aging World: International Comparisons and Policy Insights

This study aims to foster informed public discourse on inevitable tax increases in response to the substantial fiscal pressures of population aging. Chapter 2 examines how major advanced economies that experienced population aging earlier than South Korea mobilized financial resources during this demographic shift. Chapter 3 empirically analyzes tax reform strategies that reduce revenue volatility, support economic growth, and promote equitable taxation. The findings support strengthening value-added tax (VAT) and personal income tax―a widely endorsed approach mong tax experts and implemented in major advanced economies. However, Korea has limited experience with universal tax increases and faces considerable public resistance to such measures. To assess whether these concerns are based on empirical evidence, Chapter 4 examines 150 cases of VAT or personal income tax increases implemented in major advanced economies. The findings reveal that only 20% of these tax increase cases resulted in a change in government. Finally, Chapter 5 argues that concerns over political repercussions should not preclude universal tax increases as a key policy option for enhancing the sustainability of public services. The study also emphasizes two prerequisites for the government to address before initiating public discourse on tax increases: earning public trust in the efficiency and effectiveness of fiscal expenditures through structural reforms and improving the general public’s fiscal literacy.

Summary

Policy Study KOR Commuting and Fertility: Analysis and Policy Implications

While most studies on low fertility have focused on various constraints increasingly putting more pressure on individual households, including childrearing costs, this study highlights urbanization as a major driver of rising childrearing expenses. The concentration of population in large cities can trigger broader structural changes beyond merely increasing childrearing expenses at the household level. Specifically, large-scale urbanization, by increasing housing costs and commuting duration, can affect housing and marriage markets, thereby influencing young people’s decisions on housing, marriage, and childbirth. This study explores these mechanisms to shed light on the causes of South Korea’s extremely low fertility and inform policy responses.

A panel data analysis on total fertility rates (TFR) and urban population shares across countries confirms a negative correlation between urbanization and fertility, regardless of development level or institutional structure like federalism. This relationship is also not associated with extramarital births, as no pronounced effects are observed in East Asian Confucian societies. These findings support the view that large-scale urbanization is one of the root causes of low fertility. For decades, nearly all countries have expanded existing cities into metropolises and megacities, concentrating jobs vertically and spreading residential areas horizontally. The resulting congestion has increased commuting distances and times, likely contributing to declines in marriage and fertility rates.

Korea’s urban structure undermines intergenerational and intragenerational equity through fluctuations in housing asset values. Human capital across and within generations is prone to inefficient allocation, while long commutes constrain productivity potential. Thus, urban restructuring is necessary to create an environment where workers can operate at peak efficiency, leading to higher national income. Without such reform, overcoming low fertility remains elusive, as reproductive-age populations may forgo marriage or childbirth under current urban conditions.

Advanced economies have promoted family-friendly policies such as maternity and parental leave, childcare support, and early childhood education to boost fertility. However, when urbanization and per capita income―factors not accounted for in the original analysis―are controlled for using data from Olivetti and Petrongolo (2017), the effects of these policies either disappear or run counter to expectations. While these policies may be effective in government agencies, public enterprises, and large corporations, they are less so in small and medium-sized enterprises (SMEs), which account for most employment. Because SMEs tend to hire easily replaceable labor, employees requesting parental leave may face dismissal, and employers may avoid hiring unmarried women or childless married women. These dynamics are not easy to address through policy redesign alone. Moreover, as family-friendly policies target married couples, they favor wealthier ones whose marriage prospects are more strongly tied to inherited assets like housing, which raises concerns about inequity.

As effective family-friendly policies depend on a supportive environment for families to form, addressing the barriers created by large-scale urbanization should be a top policy priority. Foremost, the factors driving people into large cities must be dispersed to other regions, notably higher education and employment for reproductive-age populations. Accordingly, universities and businesses should be relocated away from large cities. Additionally, urban development and structural innovations should decentralize job clusters currently vertically concentrated in city centers to facilitate household formation through marriage and childbirth.

Theoretically, urban expansion, marriage, and fertility are interconnected as follows. As population inflows driven by employment and higher education accumulate and the children of existing urban residents enter the workforce, city centers become overcrowded and housing prices rise, prompting the development of suburban new towns. When female labor force participation is low, unmarried women generally lack the economic independence to choose singlehood, so marriage rates have little impact on urban expansion. However, following suburban development, as women’s labor force participation and incomes increase, more high-income unmarried women prefer singlehood due to commuting burdens and concerns over career interruptions associated with marriage, which lead to lower marriage rates and, in turn, lower fertility. These trends were observed in the Seoul Metropolitan Area (SMA) during the development of Seoul’s Gangnam area and the first and second phases of new town development.

To verify the relationship between urban expansion and declining marriage and fertility rates, this study empirically analyzes commuting volume data by travel time across the SMA, encompassing Seoul, Gyeonggi, and Incheon, from 2017 to 2022. The results show that higher volumes of short-distance commuting (one-way commutes of 60 minutes or less) are linked to higher fertility rates. In contrast, higher volumes of long-distance commuting (over 60 minutes) are linked to lower fertility rates. Marriage rates exhibit the opposite pattern: higher volumes of short-distance commuting are linked to lower marriage rates while higher volumes of long-distance commuting to higher marriage rates. Although it was hypothesized that the share of one-person households would increase with higher short-distance commuting volumes and decrease with higher long-distance commuting volumes, regression results showed a different pattern.

Findings suggest that many young adults, especially unmarried women, move closer to their workplaces but delay or forgo marriage due to high housing costs. When they choose to marry, they are compelled to relocate to areas with longer commutes to reduce housing expenses. Taken together, even as the short-distance commuting population increases in the SMA, only a few individuals who can afford high housing costs can marry and have children. Most others postpone marriage or move to more distant areas, where time constraints reduce the likelihood of childbirth.

Analysis of the impact of commuting duration on fertility rates in Seoul shows that economic activity, as proxied by changes in commuting volumes, has little effect on fertility, suggesting that the entire city functions as a business district. In contrast, in Gyeonggi and Incheon, fertility rates rise when the long-distance commuting population decreases or the short-distance commuting population increases. As for marriage rates, an increase in short-distance commuting volume within Seoul’s districts correlates with lower marriage rates and a rise in the share of one-person households. This suggests that high-income, professional unmarried women who choose to live in Seoul to be near their workplaces may delay or forgo marriage due to concerns about long commutes or career interruptions associated with marriage. Overall, in Seoul, more short-distance commuters correspond with a higher share of one-person households and lower marriage rates, without a meaningful correlation with fertility rates. In contrast, in Gyeonggi and Incheon, more short-distance commuters are linked to higher fertility rates, while an increase in long-distance commuting corresponds to a higher share of one-person households and lower fertility rates.

Based on these findings and the broader Korean context, this study proposes relocating universities and businesses outside the SMA, rather than expanding remote work, housing supply, or immigration. Relocating universities could lead to new university hospitals in non-capital regions, helping to reduce regional disparities in healthcare access. Also, the prospect of obtaining permission to establish medical schools can incentivize universities to relocate and help address the shortage of healthcare professionals. Furthermore, relocated universities would face direct competition with local universities, necessitating a stronger focus on industry-academic collaboration to enhance student employment and secure research funding. Government funding traditionally allocated to universities for various purposes could be redirected toward national scholarships and research and development grants.

Lastly, to build self-sustaining cities, the relocation of businesses must accompany university relocation. A sufficient number of businesses should move outside the SMA to absorb the local labor supply and foster confidence that individuals educated in non-capital regions can find employment, secure housing, get married, raise children, and lead stable lives, all within the same area. In this regard, businesses should relocate not only production and warehouse facilities but also their headquarters. While inheritance or corporate tax reductions could be considered as incentives for business relocation, industrial policy strategies should also be taken into account to ensure sustained economic growth.

Summary

Research Monograph KOR A Study on Regional Inequalities andRegional Development Strategy

Among OECD member countries, South Korea has a wide disparity in Gross Regional Domestic Product (GRDP) in absolute terms, with the gap widening further between 2015 and 2020. A similar analysis of per capita GRDP, which accounts for individual income distribution, ranks Korea higher―indicating a wider disparity― than the United States and Japan in terms of both absolute and relative terms. Overall, Korea faces significant disparities both between and within regions compared to its peers. Against this backdrop, this study empirically analyzes the current state and key drivers of the inter- and intra-regional disparities, providing policy insights for balanced regional development. It consists of two parts: (1) an examination of the impact of inter-regional disparities on population movement, and (2) an analysis of intra-regional income inequality.

Chapter 2 examines factors influencing representative indices for four key sectors―employment, education, housing infrastructure, and childcare―selected for their high relevance to the Korean context. The analysis covers 227 cities, districts, and counties across Korea from 2013 to 2022. This study empirically assesses how these four sectors influence total population (stock) and population inflow (flow) while considering mobility patterns by age group.

Findings show that better local conditions in employment and housing infrastructure contribute to growth in total population and population inflow. By age group, enhanced education and childcare services have a positive effect on attracting individuals in their 30s and 40s. In the Seoul Metropolitan Area, improvements in employment, education, housing, and childcare serve as primary drivers of population inflows. However, in non-metropolitan areas, even improvements across all four sectors do not significantly influence population inflows or mobility patterns across their administrative boundaries. Overall, the effects of sectoral improvements on population growth and mobility appear asymmetric between the Seoul Metropolitan Area and non-metropolitan areas. The stronger effects observed in the Seoul Metropolitan Area are likely attributable to differences in sectoral quality or a prevailing preference for the metropolitan area, where strengthening the key sectors in non-metropolitan areas alone may not be sufficient to drive residential relocation.

Based on the findings, the study presents the following policy recommendations for regional development. First, regional development strategies should adopt a coordinated, multi-sectoral investment approach, concurrently targeting dimensions like job creation, education, housing, and childcare, alongside a strategy to comprehensively enhance living conditions. To date, policy efforts have focused on single-sector investments, which have had limited effects on population inflows. Given the differing impacts on population inflows between metropolitan and non-metropolitan areas, narrowly focused investments alone are unlikely to serve as effective incentives for attracting people, highlighting broad-based investments as a vital policy tool for boosting regional appeal.

Second, strengthening cultural, educational, and social welfare infrastructure that reflects local characteristics is essential for improving residents' quality of life. Mobility patterns show that within non-metropolitan areas, movements mainly occur within the same cities and provinces, with limited inflows into other non-metropolitan areas. However, outflows to the metropolitan area increase when metropolitan conditions improve, suggesting the need to develop non-metropolitan areas into more viable and attractive living environments that can better compete with the metropolitan area in both quantity and quality.
Third, non-metropolitan areas need a sustainable, long-term regional development model led by local governments, together with a paradigm shift in the existing balanced regional development policy. Since qualitative improvements across all sectors take time, regional development strategies should move away from short-term population growth targets and prioritize long-term effectiveness based on regional strengths and weaknesses.

In conclusion, comprehensive improvements in sectors like employment, education, housing, and childcare through a population mobility-centered approach can help non-metropolitan areas to transform into more attractive places to live and work, complemented by tailored development strategies that reflect local characteristics.

Chapter 3 examines trends in income inequality at both national and regional levels in Korea. Using Gini coefficient decomposition analysis, the study assesses the extent to which inter- and intra-regional disparities contribute to overall income inequality. It further explores the relationship between city/provincial-level income inequality and per capita Gross Regional Domestic Product (GRDP) through a regression analysis covering 24 years (1998~2021). Additionally, the contribution of different income sources to national and regional income inequality is analyzed, with a focus on variations by age group of household heads, categorized as young (39 years and under), middle-aged (4064 years), and elderly (65 years and older).

The key findings on income inequality are as follows. First, decomposing the overall Gini coefficient into inter- and intra-regional components shows that inter-regional inequality has declined over time. In contrast, intra-regional inequality has remained relatively stable, making it a more significant factor in overall inequality. Analysis of the relationship between intra-regional income inequality and per capita GRDP at the city/provincial level based on such trends reveals an "N-shaped" pattern, where income inequality initially increases with economic growth, then decreases, and subsequently rises again. Additionally, higher average age of household heads, higher labor income across all age groups, and higher social insurance income among older adults are associated with lower income inequality. Notably, in non-metropolitan areas, the negative relationship between labor income and inequality is more pronounced.

Next, analysis of the contribution of different income sources to inequality indicates that reducing disparities across income categories―labor, real estate, other, transfer, social insurance, and financial―would be crucial for alleviating overall income inequality in the listed order. Over time, labor income inequality has worsened in the metropolitan area compared to non-metropolitan areas. Among young household heads, the contribution of labor income inequality to overall inequality was initially lower in the metropolitan area than in non-metropolitan areas, but this trend reversed around the mid-2010s and has remained higher since then. For older households, while no consistent pattern emerges, labor income inequality in non-metropolitan areas has been steadily increasing since the early 2000s.

Findings in Chapter 3 show that income inequality during economic growth follows an N-shaped pattern rather than an inverted U-shaped pattern, indicating that rising income inequality is not merely a transitional phase of economic growth but may persist or even intensify depending on various socioeconomic conditions. Therefore, continual monitoring of income inequality trends and efforts to mitigate its deepening should be integral to national and regional development strategies. Moreover, based on the analysis of income source contributions to inequality, reducing labor income disparities among young people is critical for alleviating overall income inequality in the metropolitan area. In non-metropolitan areas, the increasing labor income inequality among older adults requires particular attention. While labor income constitutes a relatively small share of their total income, its growing inequality could have a significant impact, especially given the faster population aging in non-metropolitan areas. This underscores the need to strengthen stable labor income sources for older adults in non-metropolitan regions.

Summary

Policy Study KOR A Life-Cycle Overlapping Generations Model for Welfare Program Analysis

This paper utilizes a Life-Cycle Overlapping Generations (OLG) Model to assess the welfare implications of proposed universal basic income (UBI) plans. The model incorporates Korea’s income safety net programs, including the National Basic Livelihood Security, Earned Income Tax Credit, and Basic Pension. This study quantitatively evaluates the effects of financing UBI through labor income taxes on macroeconomic aggregates, inequality, and welfare. Although welfare losses are anticipated for individuals entering the steady state, the majority of current households support UBI. In contrast, a policy designed to enhance work incentives yields welfare gains for individuals entering the steady state, though its macroeconomic effects remain relatively minor.

Summary

Research Monograph KOR Research on Structural Reforms to Enhance Sustainability of the Public Pension System

This study aims to explore structural reform measures for South Korea’s national pension scheme that can ensure both fiscal sustainability and intergenerational equity. Additionally, it seeks to redefine the basic pension system to guarantee an adequate level of retirement income. To achieve these objectives, the paper integrates fiscal projections, based on a new fiscal forecasting model, with analysis from an overlapping generations (OLG) model. Furthermore, it addresses legal issues related to pension reform and examines cases from major countries where social consensus was achieved during the reform process. The paper also discusses the introduction of the Guarantee Pension and various issues facing public pension systems in Korea.

Chapter 2. Reform Measures and Projections for the National Pension System

This chapter examines reform measures for the national pension system and analyzes their fiscal implications. Since its introduction in 1988, the national pension has undergone several reforms, adjusting both the contribution rate and the income replacement rate. However, earlier reforms seem inadequate to secure long-term fiscal sustainability. Therefore, this research has developed a projection model based on models from the National Pension Research Institute and the National Assembly Budget Office to estimate the current financial situation.

The fiscal projection model estimates the revenues and expenditures of the national pension using demographic forecasts, macroeconomic outlooks, and policy variables. According to the projections, its surplus, which stood at 72.1 trillion KRW in 2023, is expected to turn into a deficit by 2040 and further expand to a deficit of 1,005.2 trillion KRW by 2100. Consequently, the pension fund, which was 1,015.8 trillion KRW in 2023, is projected to reach a peak of 1,972.0 trillion KRW in 2039, after which it will gradually decrease to depletion by 2054.

To enhance the sustainability of the national pension, a scenario analysis is conducted, which suggest that raising the contribution rate from 9% to 12% would deplete the fund by 2060. An increase to 15% would extend solvency to 2068, while a rate of 18% would last until 2079. These findings indicate that even with a substantial and challenging increase in contribution rates, the current defined benefit (DB) scheme―which guarantees a benefit ratio over 2 regardless of contributions―would makes it difficult to sustain the fund throughout the projection period. This highlights the challenge of securing intergenerational equity and maintaining the pension fund's solvency solely through contribution rate increases under the current pension structure, which may face resistance from younger generations.

In response, this research proposes a structural reform of the national pension scheme by introducing a reformed defined contribution (DC) system called the "New Pension," while referring to the pre-reform DB system as the "Old Pension." The shortfall in benefits under the Old Pension would be covered by the government budget, allowing all generations to receive at least their principal contributions back (expected benefit ratio of 1).

The proposed DC New Pension would operate as a Cohort Collective Defined Contribution pension system, where individuals within their cohort participate in an insurance scheme to receive a pension benefit amount until death. To this end, a model has been developed to project revenues, expenditures, balance, and reserves under this system. The results indicate that under the cohort-based DC scheme, the pension fund would not be depleted, even with declining birth rates or extended projection periods, as benefits are paid only from the accumulated contributions and investment returns.

However, since the Old Pension inevitably leads to a fiscal deficit, the study also calculates the scale of this deficit. While various methods exist to measure the shortfall of public pensions, this study aligns with the logic of the Old Pension by calculating the benefits corresponding only to contributions made by current beneficiaries and active contributors (closed group method without future accruals). The financial deficit for contributions made up to 2023 is estimated at 609 trillion KRW (in 2023 present value), but if contributions continue until 2028, this deficit is projected to rise by an additional 260 trillion KRW, bringing the total shortall to 869 trillion KRW. This emphasizes the need to implement pension reforms as early as possible to mitigate the fiscal burden on the government budget from the shortfall in the Old Pension fund.

Chapter 3. Reform Measures and Projections for the Basic Pension

This section analyzes the proposed reform measures for the basic pension system and their fiscal implications. Given the high rate of elderly poverty and the substantial coverage gaps in the national pension, this study examines long-term fiscal projections for the basic pension to ensure its sustainability and enhance its effectiveness in reducing poverty. Various reform scenarios are assessed in the context of these projections to guide future policy decisions.

South Korea has one of the highest elderly poverty rates among OECD countries, largely due to the relatively recent introduction of the national pension and the fact that many older adults were unable to enroll. To address this issue, the Basic Old-Age Pension was introduced in 2008 and later restructured into the basic pension system in 2014. Currently, the basic pension provides up to approximately 333,000 KRW per month as of 2023, targeting the bottom 70% of the elderly based on their recognized income.

The current basic pension system operates on a goal coverage rate, distributing pensions to 70% of older adults. However, as the population ages and the standard pension amount increases, the fiscal pressure on the system intensifies. At the same time, as the national pension benefits increase for new retirees and economic conditions improve, the income threshold for basic pension eligibility has been rising annually. Recently, this has resulted in individuals with recognized incomes approaching 100% of the median income qualifying for the basic pension benefits. Consequently, policy discussions have emerged around improving the poverty reduction effect of the basic pension by tightening eligibility criteria, reducing the number of beneficiaries, and increasing the standard pension amount.

In this context, the study conducts fiscal projections for various reform scenarios currently under consideration for the basic pension. One scenario, proposed by Yun Seok-Myung (2023), involves fixing the eligibility threshold at its current level and indexing it to inflation. To estimate the impact of this selective reform measure on the number of beneficiaries, the study projects changes in the distribution of recognized income among future elderly populations using data from the 2014-2021 Fiscal Panel. The projections assume that the current trend in recognized income persists through 2070. The estimated distribution changes are then applied to the basic pension fiscal projection model developed by Shin Kyung-Hye and Kim Hyeong-Soo (2021) to perform the fiscal projections.

The fiscal projections reveal that maintaining the current system would result in total cumulative expenditures of approximately 3,143 trillion KRW between 2023 and 2070. In contrast, a universal expansion scenario, which increases coverage from 70% to 100% of the elderly population and raises the standard pension amount from the inflation-adjusted 333,000 KRW to 400,000 KRW from 2024 onward, would result in total cumulative expenditures of approximately 5,510 trillion KRW over the same period, which is about 75% higher than maintaining the current system. However, under the targeted improvement scenario, where the eligibility threshold is fixed at the 2023 level and indexed to inflation, the proportion of beneficiaries would gradually decrease from 70% to 23% of the elderly population each year. Even with an increase in the standard pension amount to 400,000 KRW from 2024, total expenditure would amount to 2,012 trillion KRW, a reduction of approximately 36% compared to the current system. Notably, the savings generated from reduced expenditures could increase the standard pension amount to 570,000 KRW by 2070.

It is crucial to consider the basic pension reform in conjunction with the national pension system. As the population ages and the national pension system matures, the basic pension should aim to enhance fiscal sustainability and effectiveness in poverty reduction by making eligibility criteria more targeted and increasing the standard pension amount. To achieve these objectives, the national pension must continue to fulfill its role as a public retirement income security system, while further development of the private pension system is necessary to strengthen income security provided by a multi-pillar approach. Ultimately, the basic pension could prioritize supporting the income of relatively economically disadvantaged elderly individuals, while the national pension and private pensions provide income security for those in relatively better economic conditions.

Chapter 4. Analysis of a DC-Type National Pension System Using an Overlapping Generations Model

This chapter analyzes how different age groups and income classes respond to various pension systems and economic environments by employing a heterogeneous agent overlapping generations (OLG) model within a general equilibrium framework. Unlike the financial projection model discussed in the previous chapter―which treats each gender×age×subscription period group as a homogeneous entity and does not account for endogenous changes in macroeconomic variables such as interest rates and wages―this model allows for a deeper and more nuanced analysis.

This study assumes the population structure of 2070 to examine the potential issues that may arise if the defined benefit (DB) pension system is maintained and to compare it with the responses of various age and income groups under a reformed defined contribution (DC) pension system.

In a population structure characterized by advanced aging like that of 2070, the DB pension system would require an increase in the contribution rate from 9% to 18%, yet still necessitate government support, estimated to be as high as 8.8% of GDP. In contrast, transitioning to a DC pension system would significantly reduce the government's fiscal burden and enhance the sustainability of the national pension fund. While overall production and the average living standards of the working-age population would improve under the DC system, the lower income replacement rate might exacerbate disparities. The DC system makes it more challenging to secure adequate retirement income, which could potentially widen the gap in income security between age groups compared to the DB system.

Specifically, in a DC pension system, households are likely to increase savings in preparation for retirement, leading to lower interest rates and higher wage rates, potentially worsening inequality between retirees and the working-age population. To address this, a mixed approach that uses part of the government financial support for the DB system as a supplementary support for the DC framework could be considered, providing economic benefits to both working and retired age groups. When considering a mixed approach, the DC system generally results in higher total production and post-tax income. Additionally, if the fund's rate of return exceeds the nominal growth rate, the pay-as-you-go (PAYG) pension system may become inefficient in the long term, making a DC system with government support potentially more efficient than a DB system.

Chapter 5. Directions for Public Pension System Reform

This chapter examines the legal issues surrounding national pension reforms and analyzes international cases of social consensus achieved during pension reforms in major countries. It also assesses the validity of structural reform measures for public pensions and explores the potential for restructuring the basic pension and introducing supplementary pensions to address the shortcomings of the current system. Finally, the chapter discusses issues related to South Korea’s public pension systems.

Reforming the national pension inevitably requires legislative amendments in line with constitutional principles, such as property rights, the principle of legitimate expectation, and the principle of proportionality. Legal reviews serve as an important reference, particularly Constitutional Court rulings on mandatory pension enrollment and the legality of premium collection. Adjustments to the contribution rate and income replacement rate are key measures for ensuring the financial sustainability of the national pension. While these adjustments may infringe on property rights, legislative actions that minimize the breach of trust and adhere to the principle of proportionality could be permissible within the constitutional framework.

Ideally, pension reform is achieved through broad social consensus, with active involvement from stakeholders to adjust and align various interests toward a collective agreement. However, South Korea may be ill-suited for a social dialogue-based model like Finland’s or a political consensus model like Sweden’s. The country’s low unionization rate, the absence of representative organizations for self-employed and vulnerable workers, the weak tradition of social dialogue in institutions like the Economic and Social Development Commission, and the adversarial nature of the country's two-party political system all pose challenges.

Given these challenges, the government-led consultative approach, as observed in countries like Germany, the UK, and Japan, may offer a more effective pathway for pension reform in South Korea. What is recommended in this paper is the establishment of a Pension Reform Committee composed of a small number of experts, which would be instrumental in objectively analyzing the situation and proposing directions and principles for reform, for the government to consider adopting.

The current DB pension system faces challenges in improving its fiscal sustainability solely through parametric adjustments, such as increasing contribution rates, lowering income replacement rates, or adjusting the pensionable age. These efforts are constrained by optimistic demographic assumptions underpinning policy decisions. Therefore, it is necessary to explore strategies to address potential issues from introducing a funded DC system, including investment return risks, mortality and wage growth projection errors, and income redistribution concerns. Additionally, reforms should prioritize securing retirement income adequacy.

Furthermore, the chapter discusses restructuring the basic pension and introducing the Guarantee Pension. The restructuring of the basic pension aims to protect individuals who fall outside the coverage of the national pension system, with a focus on strengthening retirement security for low-income groups. Drawing lessons from Finland and Sweden, which operate selective basic pension systems, and Canada, which has a universal system, the chapter explores the future direction of South Korea’s basic pension. South Korea should design a system that, like Finland and Sweden, targets a more limited group of beneficiaries for basic and supplementary pensions to ensure minimum retirement income for low-income seniors.

Lastly, the chapter briefly discusses proposals to enhance the national pension system, including increasing National Pension contribution rates, extending the mandatory enrollment period, raising the ceiling on standard monthly income, addressing the issue of income gaps caused by extending the pensionable age, and exploring integration options to improve equity between the national pension and occupational pensions, such as the Government Employees Pension.

Summary

Policy Study KOR Strategies for Upscaling Regional Innovation Clusters: Empricial Analysis and Case Studies

This study investigates the growth dynamics of businesses within regional clusters through empirical analysis and identifies the success factors of regional innovation clusters through case studies. Adopting a practical approach, the empirical analysis uses the data from industrial complexes―recognized as the foundation of Korea’s industrial cluster policy―in connection with the establishment level data from Mining and Manufacturing Survey. The empirical analysis addresses three questions: (1) Do businesses within clusters demonstrate superior growth performance compared to those outside? (2) What specific attributes of cluster-based businesses contribute to their growth patterns? In particular, do they demonstrate linkages with regional innovation capacity? (3) How does cluster membership influence recovery from economic crises such as the global financial crisis?

The case studies focus on Pangyo Techno Valley and the Wonju Medical Device Industry Cluster, analyzing their current status, success factors, and challenges to derive policy insights.

Key findings and policy implications are summarized as follows:

First, businesses located in industrial complexes outperform those outside both in employment and production. According to the analysis model, the businesses in industrial complexes demonstrated approximately 3~5% additional growth in employment, production, and value-added during the investigated period. This trend is consistent across most types of industrial complexes. However, their performance shows no significant correlation with the region’s innovation capacity, suggesting limited impact from the collaboration with regional innovation actors on business outcomes.

Second, there are no additional effects from the government’s cluster policies, such as Free Economic Zones and Research and Development (R&D) Special Zones, at least within the scope of the empirical analysis. While further research is needed, these findings indicate that overlapping designations and investments may dilute the effectiveness of existing cluster policies, calling for more cautious and strategic planning in future cluster policy implementation. As the Korean government is introducing Opportunity Development Zones, it should evaluate the effectiveness of previous policies and better utilize already-invested resources by connecting with existing clusters.

Third, businesses within regional clusters exhibit stronger recovery from external shocks, such as economic crises, than those outside. This advantage appears to stem from the agglomeration of industries within clusters, facilitating information sharing and access to resources. These attributes are noteworthy for building sustainable and resilient regional economic ecosystems. Moreover, the case studies reveal that the establishment and development of regional innovation clusters rely on key success factors, including leadership by regional stakeholders and the capacity to develop and manage these clusters―specifically, planning led by local actors, tight-knit collaboration among innovation actors, and cooperative governance to mobilize resources. While generalizing these findings requires caution, they provide valuable insights for fostering successful regional innovation clusters.

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