Korea’s household debt has steadily increased over the last decade with that held by seniors rising significantly in line with the increasing proportion of the population. Accordingly, this paper, composed of two parts, analyzes the vulnerability of household debt held by Korean senior households; the relationship between population aging and household debt repayment vulnerability and; the financial and non-financial characteristics of households that affect default and recovery.

The impact of population aging on the household debt repayment burden was first empirically analyzed using household-level micro data. Accordingly, it was revealed that population aging was the major driver of the changes. Over the last decade, household asset and debt held by Korean seniors have significantly increased. However, the growth in household debt has exceeded that of household asset, thus exacerbating senior households’ debt repayment burden.

Next, we examined how changes in life expectancy affects household asset and debt accumulation. In theory, people would like to increase their net asset to smooth their life-time consumption as their life expectancy increases. And consistent with the theory, an increase in life expectancy leads to an increase in household (net) asset, while it does not have an impact on household debt. In particular, an increase in life expectancy increases the household asset held by senior households, rather than that of young households. This implies that an increase in life expectancy can partly resolve the senior household debt problem.

Based on our analysis in this chapter, we can draw following policy implications. First, since most household assets held by Korean seniors are comprised of real estate, the Korean government needs to boost the asset liquidation or reverse the mortgage market, providing the opportunity to liquidate assets held by seniors. Second, policy makers need to prepare a well-designed financial education program which encourages households to make rational saving and borrowing decisions over their lifetime.

In the second part, we analyze the characteristics of Korean seniors in default, and empirically examine the factors affecting the success of a loan modification program. A sample from the Credit Counseling and Recovery Service was utilized, which is a private debt modification program in Korea. Analyzing the characteristics of the sample, it was found that senior defaulters have less income and more assets than younger defaulters. Moreover, since 2007, the debt-income ratio of senior defaulters has steadily risen and defaulters who chose ‘job loss’ or ‘business failure’ as the main reason for their default have also increased. The empirical analysis shows that the probability of failure in loan modification increases among senior defaulters with a high debt-income ratio, or with experiences of being self-employed. On the other hand, the probability of failure decreases when senior defaulters have more assets or when they have a higher share of bank loans.

Based on the second chapter, we can draw following policy implications. First, preemptive credit counseling should be provided to seniors before their debt structure deteriorates. Second, proper employment assistance should be arranged for seniors such as job-search programs to introduce stable income sources or entrepreneurship training to prevent unprepared business ventures. Third, the proper methods for asset liquidation should be introduced to seniors before they fall into default.

Executive Summary

Chapter 1 Introduction
　References

Chapter 2 Impact of Demographic Changes on Household Debt
　Section 1 Introduction
　Section 2 Literature Review
　Section 3 Data Description
　Section 4 Effects of Demographic Changes on Household Debt and Asset Distribution
　Section 5 Effects of Increased Life Expectancy on Household Debt and Assets
　Section 6 Conclusion and Implications
　References
　Appendix

Chapter 3 Characteristics of Middle-Aged and Senior Defaulters and Factors Behind Loan Modification Failures: Focus on Individual Workout Program Users
　Section 1 Necessity and Significance of the Study
　Section 2 Vulnerability Analysis of Middle-Aged and Senior Defaulters
　Section 3 Determinants of Loan Modification Failure Among Middle-Aged and Senior Defaulters
　Section 4 Conclusion: Summary and Policy Implications
　References
　Appendix

Chapter 4 Conclusion

ABSTRACT