An aging population and sustainable government debt: The case of Korea

Abstract

Although we have recently seen fiscal stress rising in many countries due to an increase in government spending and a rapidly aging population, there has been little research into fiscal sustainability while explicitly taking into account the fiscal stress caused by population aging. In this paper, we follow the same methodology as seen in Bi (2012) and examine the fiscal space of Korea, which has one of the fastest aging populations. This analysis shows that ignoring population aging leads to an over-estimation of fiscal space as large as 130% of GDP. Both increasing social security spending and supporting the National Pension significantly affect fiscal space. Finally, it is shown that fiscal sustainability and National Pension reform are closely related.