This presentation by Soon Young Choi was made at the High-level Global Symposium on Financial Education: Promoting Long-term Savings and Investments in Korea which explored policies and good practices for supporting long-term savings and investments through financial education and financial consumer protection. Find out more at http://www.oecd.org/daf/fin/financial-education/globalsymposiumonfinancialeducationforlong-termsavingsandinvestments.htm
Soon Young Choi - 2014 Symposium on Financial Education
1. Korean Household’s Retirement
Preparedness and Challenges
Soon Young Choi
Feb. 26, 2014
High-level Global Symposium on Financial Education
26-27 February 2014
Seoul, Korea
2. I. Challenges to Long-term Savings
II. Private Pensions and Financial Education
III. Conclusion
3. Korea is one of the fastest aging societies in the world, and its
first baby boom generation is set to retire soon
I. Challenges to Long-term Savings
1st Baby Boom Generation
• Expected retirement*: 2015~2023
* Based on assumption of 60 years old
as retirement age
• Year born: 1955~1963
• Share of population: 14.1%
2nd Baby Boom Generation
• Expected retirement*: 2028~2034
• Year born: 1968~1974
• Share of population: 12.0%
Source: Statistics Korea
-
100
200
300
400
500
600
700
800
900
1,000
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
Korea’s Population Distribution (2014)
Age
(thousand persons)
4. There exists a substantial gap between expected and actual
income needed for post-retirement
I. Challenges to Long-term Savings
* Estimated by applying 60% replacement ratio recommended by OECD
** Estimated income from existing household savings, insurance, public
and private pension (excluding of real-estate)
Source: KB Financial Group Research Center
Expected
required
monthly
income*
850
2,120
Estimated
actual
monthly
income**
(Gap = 1,350)
( USD )
Expected and Actual Post-retirement
Household Income
• There is a 60% gap between the
recommended post-retirement
monthly income and what
households are actually
expected to receive
• Annuitizing housing assets can
reduce the gap 10%~20%, but
such markets are
underdeveloped and
underutilized
• That still leaves a 40%~50% gap
in needed post-retirement
income that must be self-
financed
5. Household assets are predominantly in housing, with financial
assets consisting mostly of “safe” investments
I. Challenges to Long-term Savings
• Housing accounts for
the majority of
household assets and
share rises with age
– Housing as share of
household assets rise
from 41.7%(< 30 years
old) to 81.0%(60+ years
old)
• Financial assets are
mostly in safe assets
– (Cash and Deposits) +
(Pension and insurance)
account for 72.8% of
household financial assets
Source: Bank of Korea
75.1%
24.9%
Non-
financial
Assets
Financial
Assets
Household Asset Composition
Cash and
Deposits
Financial
Investment
Products
Pension
and
Insurance
Others
45.4%
27.4%
26.8%
0.3%
6. A changing environment demands a more complex portfolio
management by households
I. Challenges to Long-term Savings
• Reduced expected return of existing assets
– Slower economic growth to impact the risk-return profiles of all assets
– Lower return on safe assets to induce “money move” towards
investment assets
• Decreased share of housing, increased share of investment assets
– Return on housing also impacted by long-term fall in demand from
population aging
– Increasing use of monthly rent vs. lump-sum(chonsei) as contract form
of acquiring housing service will free up
• Managing greater longevity risk
– Base of savings with lower expected returns must support a longer
post-retirement period due to increasing life-expectancy
7. Shift in social attitudes/norms also necessitates greater self-
preparation of retirement financing
I. Challenges to Long-term Savings
9.6%
70.7%
18.2%
1.3%
22.3%
36.6% 34.6%
16.4%
2002
2012
Opinion on Responsibility of Elderly Care
Elderly
themselves
Family
only
Family,
government,
society
Government
and society
• Traditional norm of
children taking care of
elderly parents is fast
eroding
• Growing expectation and
dependence on
government and society
for post-retirement life
• Increasing need to self-
finance for post-
retirement life
Source: Statistics Korea
8. Financial literacy of vulnerable segments a key challenge,
particularly for older generation near of at retirement
I. Challenges to Long-term Savings
• Older generation accustomed to a simple formula of household asset
management (housing + deposits), unfamiliar with sophisticated
financial planning and complex financial products
• Also, for most, financial investment tend to partial, short-term and
profit oriented
• Mistrust of financial institutions also a key barrier to increasing
investment assets
• Recent financial accidents indicates lack of basic financial management
skills such as “not putting all your eggs in one basket” and “no free
lunch”, particularly among certain segments of the population
9. Women enter and exit the labor market frequently, with a
growing population of late-married/never-married
I. Challenges to Long-term Savings
• Women’s labor market participation rate continues to increase
steadily, but there is still a lot of discontinuity in the career path,
making retirement planning and private pension participation
difficult
• At the same time, there is a growing share of women delaying or
never marrying who must be responsible for their own retirement
income
• Women also tend to retire or exit the labor market earlier than
men on average, giving less time in which to accumulate
retirement savings, but an equal or longer time to rely upon those
savings
10. Declining youth employment is delaying entry into the labor
market, reducing the time to accumulate retirement earnings
I. Challenges to Long-term Savings
• Delayed entry into labor market:
– According to a recent survey by the Korea
Employment Information Service, the
average age of first employment of college
graduates is 33.2 years old for males and
28.6 years old for females
– More time and expense being spent on
building-up qualifications for employment
for those who are most financially
strapped
• Financial education for youth:
– Delayed entry coupled with rising
longevity implies that there is only around
30 years to accumulate savings for over 20
years of post-retirement life
– Financial education tailored to a new
generation of youth with its own unique
set of constraints needed
Youth Employment Rate
Source: Statistics Korea
37.0%
38.0%
39.0%
40.0%
41.0%
42.0%
43.0%
44.0%
45.0%
46.0%
11. I. Challenges to Long-term Savings
II. Private Pensions and Financial Education
III. Conclusion
12. Uncertainty about future public pension benefits necessitates a
greater role of private pension and savings
II. Private Pensions and Financial Education
• National Pension Service (NPS) is expected
to increase contributions and/or lower
benefits, but timing and amount is
uncertain
– Under the current structure of the NPS, the
pension fund will reach its peak in 2043,
following which payments will exceed
contributions, leading to depletion by 2060
• Private pensions are hoped to develop as a
solid second pillar of the national pension
scheme
– Personal Pension with tax incentives
introduced in 2001 to encourage individual
retirement savings
– Employer provided Retirement Pension Plan
introduced in 2005, to fading out the
traditional Corporate Severance Payment
System
Projection of National Pension Fund Assets
Source: National Pension Service
2,465
2012… 2034… 2043… 2060…
(Unit: trillion won)
392
13. Private pension market beginning to develop, but still much
room remains for expanded coverage
II. Private Pensions and Financial Education
• Private pension growing steadily, but levels are still insufficient to fill the
post-retirement income gap
– Private pensions(Retirement Pension Plan + Personal Pension) account for
42.1% of all pension funds, income replacement rate of 20% is half of
recommended level by OECD
– Size of private pension funds is 4.5% of GDP, far less than OECD average
of 33.9%
– Those enrolled in Retirement Pension Plans is 19%, those with Personal
Pension is 30% of population aged 20~60 years old
• Due to Korea’s high level of self-employment, Personal Pensions need to
play a bigger role as retirement savings vehicle
– Minority of working population accounts for majority of Personal Pension
savings
– Low persistency rate of Personal Pension weakens effectiveness as means
of post-retirement income
14. With increasing use of private pensions, financial education is
needed to help employees’ decision-making
II. Private Pensions and Financial Education
• More financial education in the workplace is needed to help pension
participants make better decisions
– Larger firms have pension providers offering seminars as well as in-house
education sessions, however, seminars by pension providers often are one-
time deals, offered usually only at point of sale, with few follow-ups post-
enrollment
– Content is geared towards marketing of the pension provider’s products
rather than overall financial planning and lacks customization for life-cycle
situations (e.g. new hires, mid-career, pre-retirement)
• Small-sized firms, self-employed and lower income workers with less
resources are the ones in most need, but get the least amount of retirement
planning related education
– Small-sized firms and self-employed do not get the attention and
education from pension providers accorded larger firms
– Income tax deduction merits of Personal Pensions do not apply to lower
income workers
15. I. Challenges to Long-term Savings
II. Private Pensions and Financial Education
III. Conclusion
16. III. Conclusion
• Forward Looking: Financial education for long-term savings needs
to anticipate and take into account how future changes in
economic, demographic and social environment will impact the
household’s financial decision making problem
• Tailored Content: Along with general content suitable for all,
customized content to address the circumstances and constraints of
particular segments (e.g. gender, generation, employment type, etc.)
needs to be developed
• Covering Blind Spots: Awareness and access to financial education
is a major barrier for certain worker groups (e.g. self-employed, low
in come), who are also the most vulnerable to under-saving for
retirement
Considerations for Effective Financial Education