'Increased life expectancy raises long-term growth potential'

By Choi Sung-jin

Although an increase in life expectancy adversely affects the economy by raising the savings rate and reducing consumption, it can have the beneficial effect of raising potential growth in the long run, a report says.

“The decline in private consumption and families’ propensities to consume are due to the rapid increase of life expectancy,” said Kwon Kyo-ho, a fellow at the Korea Development Institute in a report. “As the average life span increases and the period lengthens during which people have to live without income, Koreans reduce consumption and increase their savings.”

Actually, the average propensity to consume (the share of consumption expenditure out of disposal income) plunged from 77.9 percent in 2003 to 71.9 percent last year. “Since 2000, the rate of savings has risen about 3.5 percentage points as the result of increased life expectancy,” he said.

In the short run, longer life expectancy and higher savings appear to exert a harmful influence on the economy by reducing consumption, but these phenomena would eventually work to raise potential growth (economic growth that can be attained without causing adverse effects through the input of all production elements available), the KDI researcher said.

“Higher savings accumulates capital and increases investment into plants and equipment, pushing up labor productivity and raising economic growth,” the report noted.

These long-term effects, however, could be limited if people can’t find new jobs after retirement, and if the higher accumulated savings does not lead to expanded investment, the report said.

“If increased savings are to lead to the expansion of investment, it is necessary to raise the expected rate of return through rationalizing regulations and softening labor markets,” Kwon explained in his report.