Soon Young Choi - 2014 Symposium on Financial Education


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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

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Soon Young Choi - 2014 Symposium on Financial Education

  1. 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. 2. I. Challenges to Long-term Savings II. Private Pensions and Financial Education III. Conclusion
  3. 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. 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. 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. 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. 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. 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. 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. 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. 11. I. Challenges to Long-term Savings II. Private Pensions and Financial Education III. Conclusion
  12. 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. 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. 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. 15. I. Challenges to Long-term Savings II. Private Pensions and Financial Education III. Conclusion
  16. 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
  17. 17. THANK YOU