A projection has emerged that by 2065, Korea's government debt could reach as much as 173% of its gross domestic product (GDP). Concerns are rising that the potential growth capacity will decline due to low birth rates and an aging population, while economic growth will slow, leading to worsened fiscal sustainability as public expenditure continues to rise.
The Ministry of Economy and Finance submitted a long-term fiscal outlook for 2025-2065 to the National Assembly on the 3rd. The long-term fiscal outlook assumes that the current system and economic conditions remain unchanged and assesses future fiscal risks.
◇ Even under a neutral scenario, the government debt ratio is projected at 156%.
The Ministry of Economy and Finance presented this long-term fiscal outlook for 2065 based on various scenarios related to population and growth levels. Under a neutral scenario, where population and growth remain stable, the government debt ratio for 2065 is estimated to be 156% of GDP.
Based on this, if the population response is effective, the government debt ratio is projected to be 144.7% of GDP, while if the population response is inadequate, it could reach 169.6%. If macroeconomic variables allow for growth responses, the government debt ratio might be 133%, while a deterioration in growth could lead to a projection of 173.4%.
The government debt ratios varied significantly depending on the adjustments made to the variables. In particular, depending on changes in expenditure reduction, the government debt ratio in 2065 was estimated to range from 105.4% to 150.3% of GDP. A representative from the Ministry of Economy and Finance noted, "Slight adjustments to the variables accumulate over the long term," adding that "if factors like low birth rate responses, growth rate enhancement, expenditure scale, and revenue expansion change, the forecast outcomes can vary significantly."
This representative added, "The path of government debt increase can change depending on future structural reforms and the government's responses to policies."
◇ The National Pension is projected to switch to a deficit in 2048, with the fund expected to be depleted in 16 years.
However, the rising mandatory expenditure due to the serious impacts of low birth rates and an aging population could be a critical vulnerability.
The Ministry of Economy and Finance projected that by 2065, the proportion of the population aged 65 and over would rise to 46.6%, more than double that of 20.3% in 2025. In contrast, the working-age population is expected to decrease from 35.91 million to 18.64 million, reducing to about half.
This demographic change is expected to lead to a transition of the National Pension to a deficit in 2048, with the fund projected to be depleted by 2064. The teacher pension is expected to switch to a deficit in 2026 and be depleted by 2047. The government employee pension and military pension are anticipated to record deficits of -0.69% and -0.15% of GDP, respectively, by 2065.
◇ The outlook is significantly worse than the projections made five years ago.
The long-term fiscal outlook announced by the government on this day presents a grim picture of fiscal sustainability compared to the '2020-2060 long-term fiscal outlook' released in 2020.
In the long-term fiscal outlook released five years ago, the government estimated the government debt ratio would level off between 64.5% and 81.1% of GDP by 2060.
However, this long-term fiscal outlook predicts that by 2035, the government debt ratio will exceed 68.9% to 73.3%, and by 2045, it could reach over 100% of GDP.
It indicates that the growth rate outlook has become more pessimistic compared to five years ago, and the fiscal deficit situation has worsened.