South Korea

THE CURRENT STATE OF DEMOGRAPHICS AND DEBT IN SOUTH KOREA

South Korea is in a unique position among global economies. Over the past several decades, it has recovered from the devastation of the Korean War and transformed itself from a low-income and authoritarian state into a high-tech, high-income, and democratic economy with rising living standards. Throughout much of this period of rapid growth, government debt remained relatively low. In recent years, however, public debt has increased steadily, reflecting global shocks.  While debt levels have not yet reached the high levels observed in many advanced economies, the overall trend warrants attention. 

The demographic situation appears bleak, a conclusion not stated lightly.  South Korea is undergoing the fastest demographic transition on record, driven by the lowest fertility rate in the world, rising life expectancy, and a rapidly shrinking working-age population. The population is projected to decline sharply over the coming decades, placing substantial pressure on public finances through higher pension, healthcare, and social spending, while simultaneously constraining potential economic growth. As population aging accelerates, South Korea is likely to face fiscal pressures that rival or exceed those observed in older aging societies such as Japan, raising critical questions about its ability to sustain long-term growth and fiscal stability. 

MODEL EVALUATION

To determine the predictive accuracy of each model, a robustness test was conducted. All models were trained exclusively on data through 2013, and then tasked with forecasting Korean government debt levels from 2014 to 2023 using the actual demographic changes that occurred during those years. These predictions were then compared to the actual 2023 debt level. 

The results indicate substantial variation in out-of-sample performance across model specifications. A potential explanation for the larger forecast errors is that South Korea transitioned from a rapidly growing emerging economy to a fully developed economy with more predictable economic dynamics in recent decades. Because the models are trained on older data, they may capture relationships that were historically relevant but are no longer fully representative of modern South Korea. The Low Government Debt Countries model produced the lowest forecast error, followed closely by the 1990 Global Sample, 2004 Global Sample, and High Income Countries specifications. Notably, the strong performance of the Low Government Debt Countries model suggests that, even in the presence of severe demographic pressures, fiscal starting conditions play an important role in shaping debt dynamics.  These results indicate that the demographic aging to debt relationship captured by the better-performing specifications is structurally robust and provides a credible foundation for long-run Korean debt forecasting. 

INTERPRETATION

Across all model specifications, South Korean government debt is projected to rise sharply in the coming decades, with many forecasts implying debt levels that have historically been observed only in Japan.  While the magnitude of the increase varies across model specifications, the direction of change is consistent. As population aging accelerates and the labor force contracts, sustained upward pressure will be placed on South Korea’s public debt levels in the long run. 

Even under the assumption of no future major shocks, South Korean debt is projected to exceed 200 percent of GDP in most model specifications by 2050.  Even the most conservative model implies debt approaching 180 percent of GDP by midcentury. These results suggest that while South Korea has historically maintained low debt levels, this fiscal position is unlikely to persist in the face of severe demographic pressures, raising the risk that South Korea faces the same challenges that have permanently weakened Japan's economy.