🚨 National Debt to Surge to 156% of GDP in 40 Years
Today Korean Economic News for Beginners | 2025.09.04
0️⃣ National Pension to Run Out by 2064, Private School Pension by 2047
📌 Low birth rates and aging population threaten fiscal health - young generation faces huge burden without structural reforms
💬 The government released shocking numbers in its long-term fiscal outlook. Korea's national debt-to-GDP ratio could jump from the current 49.1% to 156% in 40 years. Even more serious is the public pension crisis. The National Pension will turn into deficit starting 2048 and be completely depleted by 2064, while the Private School Pension will run out by 2047. The Ministry of Economy and Finance warned that "fiscal health will be seriously damaged if current systems remain unchanged" and stressed that pension reform and fiscal restructuring are urgent. In particular, mandatory spending will surge from 35.8% in 2025 to 58.7% in 2065, greatly reducing the government's policy flexibility.
1️⃣ Easy Explanation
The government's long-term fiscal outlook is basically a warning that says "if we continue like this, our country's finances will become very difficult." It shows the shocking possibility that our nation's debt could exceed 1.5 times our economic size in 40 years.
First, let me explain what the national debt ratio means. This is a number that compares a country's debt to its economic size (GDP). For example, if a household earns 50 million won per year but has 25 million won in debt, their debt ratio would be 50%. Currently, Korea is at 49.1%, which is a manageable level, but it could rise to 156% in 40 years.
The biggest reason this happens is "low birth rates and aging population." When fewer babies are born and people live longer, the number of working people decreases while the number of people receiving welfare increases. The problem becomes especially serious when the baby boom generation (born 1955-1963) retires in large numbers and starts receiving pensions.
The National Pension situation is even more serious. Right now, more people pay into the pension than receive it, so the fund is growing. But starting in 2048, it will turn into deficit, and by 2064, the fund will be completely empty. This means future generations might only pay into the system without ever receiving benefits.
The Private School Pension (for private school employees) faces an even more urgent situation. It's expected to run out by 2047, which is 17 years earlier than the National Pension. This is because the Private School Pension provides higher benefits but has fewer contributors.
"Mandatory spending" is also an important concept the government mentions. This is money that must be spent according to law, typically welfare expenses like pensions and health insurance. The portion of mandatory spending in the total budget will grow from the current 35.8% to 58.7% in 40 years. This means the government will have less money available for new policies or investments.
In the end, the government's diagnosis is that we need structural reforms starting now, including pension system reform and tax structure adjustments, to solve this problem.
2️⃣ Economic Terms
📕 National Debt Ratio
The national debt ratio is the country's debt divided by its economic size (GDP), serving as a key indicator of fiscal health.
- Generally, 60% or below is considered safe, while above 100% is seen as a danger signal.
- Korea is currently at 49.1%, which is lower than the OECD average (71.1%), but the rapid increase trend is concerning.
- Japan currently has the world's highest national debt ratio at around 260%.
📕 Mandatory Spending
Mandatory spending is budget that the government must spend based on laws, mostly for social security.
- National Pension, health insurance, basic pension, and child allowances are typical mandatory spending items.
- As aging accelerates, mandatory spending automatically increases and is difficult to control at the government's discretion.
- When mandatory spending portion increases, there's less budget available for economic stimulus or new policies.
📕 Pension Reserve Fund
Pension reserve fund is money saved in advance to ensure stable operation of pension systems.
- Korea's National Pension reserve fund is currently about 1,000 trillion won, the third largest in the world.
- However, it's expected to run out around 2064 due to rapidly increasing spending from aging.
- When the reserve fund is depleted, pensions can only be paid from current premium income, potentially causing sharp cuts in benefits.
📕 Fiscal Health
Fiscal health refers to the balance between government income and spending, meaning the ability to manage finances sustainably.
- Continued deficits and rapidly increasing debt worsen fiscal health.
- Poor fiscal health can lead to credit rating downgrades and higher interest rates.
- The OECD recommends keeping fiscal deficits below 3% of GDP.
3️⃣ Principles and Economic Outlook
✅ Impact of Demographic Changes on Government Finances
Let's analyze the specific impact of low birth rates and aging on Korea's government finances.
First, the tax base will shrink rapidly as the working-age population decreases. Korea's current total fertility rate is 0.72, the lowest among OECD countries. This means only one-third as many people are born compared to their parents' generation. According to Statistics Korea projections, the working-age population (15-64 years old) will decrease by 11.49 million people (31.7%) from 36.25 million in 2025 to 24.76 million in 2065. This means two-thirds as many people will pay taxes. Key tax sources like income tax and corporate tax will be significantly reduced, inevitably decreasing government revenue.
Second, welfare spending will explode as the elderly population surges. The population aged 65 and over will nearly double from 9.5 million in 2025 to 18.27 million in 2065. Their share of the total population will jump from 19.5% to 37.0%. This is higher than Japan's current level (28.8%), meaning a super-aged society. As the elderly population grows, spending on pensions, health insurance, and long-term care insurance automatically increases. According to government estimates, social security spending will more than triple from 270 trillion won in 2025 to 831 trillion won in 2065.
Third, the rapidly increasing dependency ratio will reduce economic vitality. The old-age dependency ratio (population 65+/working-age population×100) will surge from 26.2 in 2025 to 73.8 in 2065. This means 100 working-age people must support 74 elderly people. Currently, 100 people support 26 elderly people, so the burden will nearly triple. In this structure, personal consumption and corporate investment will shrink, and economic growth will inevitably slow down.
Demographic changes are not just a population issue but a structural crisis threatening the sustainability of the entire economy.
✅ Pension System Crisis and Reform Direction
Let's examine the causes of the public pension depletion crisis and specific solutions.
First, the National Pension's structural problems have reached a serious level. Currently, the National Pension guarantees a 40% income replacement rate if contributors pay premiums for 40 years based on average monthly income. However, the dependency ratio is surging as future contributors rapidly decrease due to low birth rates. While there are currently 22.78 million contributors versus 6.76 million beneficiaries (dependency ratio 3.4:1) in 2025, by 2060 there will be 17.66 million contributors versus 16.81 million beneficiaries (dependency ratio 1.05:1), almost a 1:1 structure. In this situation, the current 9% premium rate cannot maintain a 40% income replacement rate.
Second, the Private School Pension faces an even more urgent situation. The Private School Pension has a 60% income replacement rate, higher than the National Pension, but only has 440,000 contributors. Moreover, aging among private school employees is accelerating, with mass retirements expected to begin in the 2030s. The current reserve fund is around 25 trillion won, but annual spending growth far exceeds income growth, making depletion by 2047 inevitable. Due to its small size, discussions about integrating the Private School Pension with the National Pension are emerging rather than individual reform.
Third, the core of pension reform is balancing benefits and contributions. Looking at overseas examples, Germany is gradually delaying pension eligibility age to 67, while Sweden introduced a notional defined contribution system that automatically adjusts benefits as life expectancy increases. Korea must also comprehensively review premium increases, benefit adjustments, and retirement age extensions. The government is considering raising premiums from the current 9% to 12-15%, or lowering the income replacement rate from 40% to around 35%.
Pension reform requires sophisticated design that considers both intergenerational equity and system sustainability.
✅ Fiscal Restructuring and Intergenerational Burden Sharing
Let's analyze strategies for distributing and managing the rapidly increasing fiscal burden.
First, various revenue expansion measures are being considered. Korea's current national burden rate (taxes + social security contributions/GDP) is 28.4%, lower than the OECD average (34.1%). With welfare spending surging, an increase in the burden rate seems inevitable. Specific measures include raising the top income tax rate, adjusting corporate tax rates, and increasing VAT rates. New revenue sources like digital taxes and carbon taxes, plus preventing tax avoidance, will also be pursued. However, rapid tax rate increases could reduce economic vitality, requiring a gradual approach.
Second, improving efficiency through spending restructuring is important. With mandatory spending increases inevitable, discretionary spending priorities must be readjusted. Particularly, SOC investments and subsidy-type spending should be strictly screened and concentrated on essential areas. Welfare spending should also shift from simple cash payments to areas with greater effects on human capital investment and job creation. The government plans to introduce zero-base budgeting from 2027 to review all programs from scratch.
Third, policy design considering intergenerational equity is essential. Maintaining current policies could make future generations' burden excessively heavy. According to the National Assembly Budget Office analysis, current people in their 20s are expected to pay an additional 250 million won in taxes over their lifetime. Meanwhile, current people in their 60s and above are expected to receive more benefits than they pay. To resolve this imbalance, existing beneficiaries must also share some burden, and support for younger generations should be expanded.
Overcoming the fiscal crisis requires social consensus for all generations to fairly share the burden.
4️⃣ Conclusion
The future shown by the government's long-term fiscal outlook is not an unavoidable fate. If we begin bold structural reforms now, we can sufficiently mitigate the crisis to manageable levels. However, the longer we delay reforms, the heavier the burden on future generations will become.
The most urgent task is pension reform. The depletion of National Pension and Private School Pension is already predetermined, and the longer we delay, the more difficult solutions become. We must take the bitter medicine of premium increases and benefit adjustments, but this is absolutely necessary to make the system sustainable. This is the path already taken by advanced countries like Germany and Sweden, and we cannot avoid this process.
Restoring fiscal health is also important. If the national debt ratio soars to 156%, this would be similar to Greece during its fiscal crisis. Before that happens, we must balance finances through revenue expansion and spending efficiency. However, rapid austerity could harm economic growth, requiring a gradual and strategic approach.
Most importantly, fair burden sharing between generations is crucial. It's unfair to keep current benefits for middle-aged people while transferring all burden to future generations. All generations must make some sacrifices and share the burden to find sustainable solutions.
Actually, this crisis is also an opportunity. It can be a chance to solve structural problems we've been postponing all at once. If we reasonably reform pension systems, improve fiscal management efficiency, and resolve intergenerational conflicts, we can create a healthier and more sustainable society.
Politicians must also pursue policies from a long-term perspective rather than being absorbed in short-term popularity or votes. Difficult reforms require social consensus that transcends political parties.
Ultimately, this long-term fiscal outlook shows our society is at a crossroads. Will we undertake painful reforms now, or will we pass problems to future generations? The wise choice is clear.
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