Authors: Jay H. Hong, Youngjae Lee(Seoul National University), Taesu Kang(BOK)

Abstract

We study the quantitative effects of population aging driven by declining mortality and fertility rates in Korea. We then examine the macroeconomic effects of raising the mandatory retirement age in such an aging economy. When mortality rate decreases, aggregate capital increases since individuals save more for longer retirement. In contrast, an increase in aggregate labor input is negligible since lower mortality rate mostly affects those who are out of the labor force. When fertility rate decreases, both aggregate labor and capital inputs shrink radically because aggregate population diminishes along with the working age population and aggregate saving plunges due to a downsized population.
We analyze the effects of population aging when mortality rate of all ages decreases by 1% each year and population growth rate drops from 0.7% to 0.3%. A huge drop in aggregate labor input drags down the aggregate output by about 15%. The pension system will run a big budget deficit with more retirees and smaller number of workers.
The government can alleviate the negative effects of population aging by raising the mandatory retirement age. When the workers’ retirement is postponed by 3 years, both aggregate labor input and capital increase and pension deficits are reduced significantly.