Among the increased number of developed nations facing the longevity conundrum, in which a shrinking workforce must offset the care needs of a growing aging population, South Korea has become an outlier.
At the end of 2024, Korea became a "super-aged" society, which the United Nations defines as an economy with more than 20% of the population 65 years old or over. Notably, Korea took roughly seven years to reach this status, compared with 11 for Japan, the first “super-aged” nation, and 19 years for Europe and its bloc of 27 economies.
If the size of South Korea’s working population continues to decline, the economy could begin contracting by 2040, compared with its current growth of 2%, according to the Korean central bank.
"Korea faces some of the world’s most challenging demographics. The government didn’t overstate the case when it declared a national demographic emergency in June, calling it a ‘population crisis,' says Kathleen Oh, Morgan Stanley’s Chief Korea and Taiwan Economist. “The good news is that the sense of urgency appears real, with authorities moving toward structural reforms and away from short-term fixes.”
Fertility Slump
Korea's fertility rate hit a world-record low of 0.72 children per woman in 2023, compared with the rate of 2 needed to maintain a stable population. What’s more, the government projects the population will start declining by next year, ultimately dropping by a third over the next four decades, while the working population will halve by 2065.
While fertility rates have been falling worldwide over the past 50 years, several factors are specific to Korea.
First, marriages declined during the pandemic and because having children out of wedlock is still taboo in Korea, birth rates dropped sharply. The number of newborn babies fell 10% in 2020 and continued to drop, albeit more slowly, through 2023. Although marriages and births picked up after the economy reopened, the fertility rate has barely moved.
Second, an 80% surge in house prices over the past decade has contributed to young adults delaying or discouraging marriage and/or starting or expanding a family. A 2023 government survey showed 40% of respondents cited the financial burden of child rearing and high housing expenses as reasons not to have any or more children.
Third, an overlooked yet pressing area in need of reform is education. In Korea, private education accounts for 12% of household spending—more than what families spend on basic necessities or food. Proposed solutions to ease the financial strain on families and make raising children more affordable center around cutting the high costs of education and childcare, and providing more support in the form of after-school programs, which face challenges from a shortage of workers and infrastructure.
Paradigm Shift
South Korea’s government has been working on the fertility issue for the past 20 years, investing more than $320 billion in possible solutions, including 2005 measures to stimulate population growth. While these efforts may have raised awareness, they focused on short term, one-time actions such as providing funds for low-income families. They failed to address the root causes of the problem: income instability in combination with high costs for childcare and education.
Now policymakers are starting to take more targeted steps to tackle these fundamental problems. The pension system is being overhauled for the first time in 15 years in a bid to push back the depletion of Korea's public pension fund, which is projected to run out of funds by 2055 at the current pace, until the 2080s.
On the labor front, efforts to bolster the workforce by improving work-life balance, closing the gender wage gap and better supporting working parents are under way. The government is examining an increase in the statutory retirement age and introducing a "wage peak out" system that gradually reduces wages for workers leading up to their retirement age to make room for hiring younger workers.
The government is also looking at importing talent. At 3.4%, the proportion of foreign workers in the labor force remains relatively low, and leaders are reviewing immigration policies to ease talent shortages for both highly paid and low-skilled jobs.
"Opening up the economy to foreign workers will be critical from here. The political consensus over accepting more immigrant workers has been growing but still remains fairly stagnant," says Oh.
Market Solutions
Finally, policymakers are looking to the country's capital markets to help households build wealth, attract foreign investment and lower borrowing costs. One goal is to expand investment opportunities and allow people to supplement their regular salaries, encouraging family expansion.
Other measures aim to address the so-called Korea discount, which refers to local companies' lower valuations compared with their global peers; improve the country's financial market infrastructure; and raise its ranking in global indices. This could attract more foreign investment, while lowering borrowing costs for businesses and the government, giving the latter more scope to tackle structural issues.
"By promoting advancement of the financial industry, there are more opportunities to ensure market stability and ultimately support real economic stability and growth," says Oh.
