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Optimistic projections based on a rebound in the birth rate

Optimistic projections based on a rebound in the birth rate

Posted January. 28, 2023 07:42,   

Updated January. 28, 2023 07:42


One forecast illustrates that should the national pension be maintained unaddressed of inherent issues, the fund would run out in 2055, two years earlier than expected five years ago. The interim results of the 5th fiscal estimate announced yesterday by the National Pension Service Financial Estimation Expert Committee indicate that the national pension will turn to deficit in 2041, one year earlier than the 4th estimate in 2018, and the fund is expected to be depleted in 2055 when people born in 1990 will start collecting their pensions.

If the accumulated funds run out, future generations will have to be shouldered with roughly 30% of the fund premium. The problem is that even this bleak estimate is based on hopeful socio-economic indicators. The issue starts with the birth rate, which is a crucial variable. In the 5th estimate, it was assumed that the total fertility rate would drop to 0.7 next year before picking up to 1.21 in 2050. However, in practice, the birth rate is falling faster than government projections, and there is a logical reason to believe the otherwise is true.

As for economic variables, the 5th estimate expected the labor force participation rate of the working-age population (15-64 years old) at 71.6% between 2023 and 2030, while the Ministry of Employment and Labor expected it to come in at a lower 71.1-71.4% in its announcement last year. The estimated economic growth rate is set at 0.2-0.4% after 2050. Still, an international report issued by a specialized agency suggests that Korea will likely experience negative growth by then. Forecasts are naturally different from reality, but unfavorable conditions must be considered in estimations, for they will serve as the basis of government policies.

The government argued that it used the median value among the fertility rate projections in its provisional estimate and even reflected the worst-case scenario in the final estimate. However, criticism was raised that the 4th estimate was also based on optimistic indicators. In 2020, the birth rate was projected to stand at 1.24, but it was 0.84, and the labor force participation rate (based on males) was expected to rise to 80% in 2020, but it dropped to 72.6%.

It will be difficult to formulate a proper roadmap for reform should the reliability issues be raised every time estimates, serving as the basis for pension reform, are released. Fuel for innovation will likely lose steam as well. Although the government said it announced a provisional forecast in advance to expedite renovation, there are voices of concern about the lack of commitment to reform by presenting an optimistic outlook from the outset. The final estimate to be released in March should reflect the most pessimistic scenarios, considering the world's unprecedentedly rapid-declining birthrate and aging population. Having them run by external experts is also worth considering to add more reliability to the estimates.