Demographic Transition and Social Security: The Case of Korea

Abstract

After the baby boom period from late 1950''s till 1970''s, the fertility rte in Korea has shown a drastic downward trend. This demographic change makes it inevitable that over the next 70 years, Korean population would include rapidly increasing aging group as many western developed countries do. The purpose of this paper can be summarized as follows. (1) To evaluate the effect of aging population on the resource allocation and welfare redistribution across generations in Korea. (2) To evaluate the effect of National Pension System(NPS) introduction on Korean economy and also on welfare across generations. (3) To compare the effects of alternatives which are considered as solutions for the financial crisis of the NPS in the future.

The results of the simulation using a modified version of Auerbach and Kotlikoff (1987)''s dynamic overlapping generations model can be summarized as follows. (1) The population aging of Korea resulting from a drastic fall of the fertility rate is expected to bring the change in production factor suppluy and in price and therefore, it will have a huge influence on the welfare of future generations. (2) The introduction of current NPS reduces the welfare of future generations drastically due to the decrease of labor supply and wealth accumulation. (3) The alternatives which involves the methods to reduce pension benefit payment including a rise of the pension benefit commencement age, reinforcement of earnings means-test, and the imposition of taxes on the pension benefit payment, would be much more effective to solve the financial crisis of the NPS than the alternatives to increase the contribution to the pension such as a rise of pension premium, the transformation of pension financing method from a currently partly funded system tp Pay-As-You-Go system.