Analysis from a national policy research institute has revealed that the rapid increase in life expectancy is causing private consumption growth to consistently lag behind economic growth rates. As life expectancy has significantly increased compared to the retirement age, individuals in their 50s and 60s are increasing their savings in preparation for retirement.
Consequently, suggestions have been made to address structural issues in the labor market to curb the decline in average consumption propensity and alleviate the downward pressure on potential growth rates. Specifically, the analysis advocates delaying retirement or revitalizing the reemployment system after the official retirement age.
The Korea Development Institute (KDI) released this analysis in a report titled "The impact and implications of demographic factors on consumption propensity" on the 24th.
◇ As life expectancy increases, consumption declines across all age groups… "Consumption propensity is expected to rebound starting in 2034"
According to the report, South Korea's private consumption growth rate has averaged 3.0% over the past 20 years, consistently falling below the gross domestic product (GDP) growth rate of 4.1% during the same period. Consequently, the consumption propensity (the ratio of private consumption to GDP) has also shown a downward trend, decreasing by 3.6 percentage points from 52.1% in 2004 to 48.5% in 2024.
The KDI identified the sharp increase in life expectancy as the main cause of this phenomenon. Life expectancy in South Korea increased by 6.5 years over the past 20 years, from 77.8 years in 2004 to 84.3 years in 2023.
Research Fellow Kim Mi-ru at KDI noted, "Despite the increase in life expectancy, there has been little change in the retirement age in the life cycle," and explained that, "In anticipation of the possibility of engaging in relatively low-income and unstable jobs after retirement, the propensity to save appears to have increased."
In fact, KDI estimates that most of the decline in consumption propensity (-3.6%P) over the past 20 years can be attributed to the increase in life expectancy, with consumption propensity falling by an average of 0.48%P for each additional year of life expectancy.
In particular, the decline in consumption propensity among those in their 50s (-1.9%P) and 60s (-2.0%P) was pronounced. This is interpreted as being due to the fact that there is not much time left to work compared to younger individuals, making them more sensitive to increases in life expectancy.
KDI predicts that the consumption propensity will fall to 46.3% by 2034 before rebounding. This is because, over the next 20 years, life expectancy is expected to increase by only 3.5 years, and the proportion of the super-aged population is expected to increase, leading to expenditure growth outpacing income growth. Additionally, the decline in the working-age population is expected to impact the slowdown in overall economic growth.
◇ "Revitalization of the reemployment system and breaking the rigid wage structure are necessary"
KDI diagnosed that structural constraints in the labor market are blocking the expansion of private consumption. In particular, it emphasized the need to address structural issues that limit labor market participation among older adults, enabling appropriate adjustments to retirement timing in response to increased life expectancy.
Specific policy directions include ▲ Improving the rigid wage system based on seniority ▲ Strengthening the performance-based wage system ▲ Revitalizing the reemployment system after the official retirement age, indicating the need to encourage labor market participation among older adults.
Research Fellow Kim stated, "If older workers are utilized effectively, it could help offset some of the downward pressure on potential growth rates caused by low birth rates and aging populations."