Gov't debt-to-GDP ratio to up to 92% by 2060

Ministry of Economy and Finance Fiscal Policy Director General Na Ju-bum speaks during a press briefing at the Sejong Government Complex, Wednesday. Courtesy of Ministry of Economy and Finance

NPS to record a net loss as early as 2041

By Lee Kyung-min

The government debt-to-GDP ratio could more than double in the next four decades due to slower-than-feared growth brought on by a rapid decrease in the working population, the finance ministry said Wednesday.

Tighter control of government discretionary spending is required, given mandatory spending is certain to climb amid expanded social and welfare programs following explosive demand from the growing numbers of the elderly in the population.

The sustainability of eight state-run social and welfare funds will be brought into question, unless reformed via increasing premiums, reducing payouts and improving returns on fund management among other ways to bolster efficiency.

The ministry said the National Pension Service (NPS), Korea's state-run pension fund and the third-largest in the world with 698 trillion won ($588 billion) in assets under management, will begin to report net losses as early as 2041, a year sooner than 2042 as estimated by the fund.

According to a fiscal outlook report for 2020 through 2060 released by the Ministry of Economy and Finance, Korea's debt-to-GDP ratio is expected to soar to 92 percent in 2060, more than double the 43.5 percent this year.

This was premised on the steady increase of mandatory spending due to a spike in interest payments on government debt as well as payouts to subscribers of the state pension system and elderly low-income earners.

The premise was based on a scenario whereby the government would put in place a mandatory spending of 10 trillion won, 20 trillion won and 30 trillion won from 2025 to 2040, 2041 to 2050 and 2051 to 2060, respectively, following a steady revenue increase of at least 2 percent of the country's GDP through 2050.

Another premise was that the country's spending total would maintain a level similar to nominal growth, coupled with fiscal balancing, excluding the four social funds, beginning to report a surplus as early as 2057 and 2058 at the latest.

The figure of 92 percent is based on the worst-case scenario defined by the failure of government efforts to tackle low birth rates and bolster productivity.

It factored in a baseline economic and population scenarios each made by the Korea Development Institute (KDI) and Statistics Korea. The KDI viewed the real GDP growth would slump to 0.5 percent in the 2050s, a sharp fall from 2.3 percent, while the statistics agency said the population will shrink by 8.94 million in 2060, from over 51 million in 2020.

But the figure can be limited to as low as 55.1 percent, if the economy manages to report real GDP growth of 1.3 percent in the 2050s, following 3.8 percent growth from 2020 through 2030 driven by the success of state-run projects and increases in private investment.

The ministry said the NPS will record a net loss in 2041, as the number of subscribers will decline faster than that of recipients.

The ministry data showed 22 million subscribers far outnumbering the 525,000 recipients in 2020. But the number of subscribers will sink to 17.85 million in 2040, whereas the recipients will spike to 13.07 million.

The number of recipients will soar further to 16.28 million in 2050 and 17.2 million in 2060. That of subscribers will dip to 14.88 million in 2050 and 12.09 million in 2060.

“It is vital for the government to continue efforts toward structural reform to enhance productivity and remove overall efficiencies to tackle low growth,” the ministry's director general for fiscal policy Na Ju-bum said.