Working Paper（25-017E）Addressing the Demographic Decline in South Korea

In this paper, we use an overlapping generations-standard incomplete markets model to quantitatively investigate the long-run implications of Korea’s demographic changes and policy reforms. Importantly, our quantitative model endogenizes the retirement decision and matches the elasticity of retirement to wealth. Optimal policy likely combines reforms such as increasing the retirement age, higher taxes, or changes to retirement benefits. We use the model calibrated to Korea’s economy and demography as a quantitative laboratory to investigate two policy scenarios: increasing taxes or decreasing benefits. While decreasing benefits leads to great long run activity, it comes at the cost of lower average welfare, particularly for retirees.