Authors: Byung Kwun Ahn (BOK), Ki-Ho Kim (BOK), Seung Whan Ryuk (BOK)

Population aging has a profound influence on the overall economic variables, such as inflation, current account and public finance, as well as economic growth. However, more specifically, how and to what extent population aging affects economy is considerably influenced by economic system, agents’ behaviour, and policy maker’s policies. Thus, the effect of population aging will be determined by our responses to the challenges. This paper estimates the effect of population aging on economic growth based on a simple growth accounting model, reflecting the demographic projection released by the National Statistics Office. The result shows that the economic growth rate of Korea is estimated to gradually decline from 3.9% (2000 to 2015) to 1.9% (2016 to 2025) to 0.4% (2026 to 2035) on annual average. However, if Korea implements comprehensive measures (e.g. extending retirement age, encouraging women’s economic participation, along with improving productivity and fertility rates) responding to population aging, the economic growth rate is predicted to maintain around upper 2% in 10 years and around mid 1% in 20 years on annual average. Since the effect of population aging on economy may be dramatically changed according to policy responses, comprehensive measures should be set up at the national level to reduce the speed of population aging and to alleviate negative effects, followed by more detailed action plans in each sector.