Korea’s national debt ratio to triple by 2065 under current policies: Report

(Yonhap)

South Korea’s national debt is projected to reach 156.3 percent by 2065 if the current system and policies remain unchanged, which is more than three times this year’s level at 49.1 percent, data showed on Wednesday.

The Ministry of Economy and Finance submitted its Long-term Fiscal Outlook 2025-2065 to the National Assembly, warning that slowing growth, a shrinking workforce, and rising welfare costs from rapid aging will steadily erode fiscal sustainability.

The outlook was based on Statistics Korea’s demographic projections and the Korea Development Institute’s (KDI’s) macroeconomic forecasts. It includes five different scenarios depending on population and growth assumptions.

In the baseline scenario, if the total fertility rate remains around 1.08 and the real growth rate falls to an annual average of 0.3 percent between 2055 and 2065, the debt-to-GDP ratio will reach 156.3 percent in 2065.

If birthrates or growth improve, the ratio could decline to around 133 percent. But if zero growth materializes, the debt ratio could soar as high as 173.4 percent.

The root cause of fiscal deterioration lies in demographic changes.

The working-age population will shrink from 35.91 million this year to 18.64 million in 2065 – almost cut in half – while the elderly population ratio will surge from 20.3 percent to 46.6 percent over the same period.

The share of mandatory spending to support the rapidly growing elderly population will rise from 13.7 percent to 23.3 percent.

While total revenue will remain almost flat, total spending will rise from 26.5 percent to 34.7 percent, widening the fiscal imbalance.

The ministry warned that debt growth could accelerate beyond projections if fiscal spending expands.

Korea’s supplementary budget this year sharply raised deficit bond issuance, and the administration has pledged average annual spending growth above 5 percent during its term.

Heavier borrowing could lift bond yields and financing costs, squeezing government budgets and raising borrowing costs for households and businesses.

The ministry said fiscal restructuring could significantly slow debt growth.

According to its calculations, if mandatory spending increases in programs such as the National Pension and National Health Insurance are reduced by 15 percent over 20 years, the debt ratio could fall by 50.9 percentage points, remaining at around 105.4 percent.

“Even minor adjustments in variables, when accumulated over the long term, produce major differences, the ministry said.

To secure fiscal sustainability, the government outlined four key tasks – creating a virtuous cycle between fiscal policy and growth by boosting economic growth, expanding the revenue base, enhancing spending efficiency, and reforming social insurance programs.