How the Youth Leap Account Can Help Young People Save

Demographic and household structural changes increase young people's need to build wealth. Photo credit: KIF.

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Under this program, the Republic of Korea will complement the savings of qualified young Koreans.

Introduction

The Republic of Korea is looking to the young people to build wealth amid weakening macroeconomic and labor market conditions, a tight fiscal environment, and demographic and household structural changes. Young people’s net assets have been growing at a slower pace compared to other age groups.

To encourage those aged 19 to 34 to save, the Korean government plans to launch the Youth Leap Account, a savings account support program. It is expected to provide asset accumulation opportunities, bridge the wealth divide, and build the foundation for the economic independence of young Koreans.

The successful implementation of this program depends on several factors, including measures to ensure fairness, equity, consistency, and alignment across different savings schemes. The country already has several programs in place to encourage the youth to save more.

Analysis

The macroeconomic and labor market conditions in the Republic of Korea are weakening. The annualized real economic growth rate was 8.9% in the 1980s, 7.3% in the 1990s, 4.9% in the 2000s, and 3.1% in 2010 and onwards. In 2023, it is expected to be in the 2% range in the aftermath of the pandemic and disruptions to global supply chains. Lately, nominal interest rates have been rising as policy rates are hiked, while real interest rates show a downtrend due to high inflation, thus affecting asset profitability. These make it challenging for young Koreans to secure sufficient wealth or assets for post-retirement living, not to mention the prospect of their retirement pensions dwindling in value.

The intergenerational asset divide in the country is also widening. The growth of net assets is slower for young people compared to other age groups. In 2020, the average total assets and liabilities for heads of households aged 19 to 34 were 153.29 million won ($118,299.40) and 53.76 million won ($41,488.52) respectively. Their average net asset was roughly 99.53 million won ($76,810.88)—with minimal change from 10 years ago at 92.89 million won ($71,686.55). Between 2010 and 2020, the average net assets of households led by those 20 to 39 years old increased by 22% (35 million won or $27,010.76) to 192 million won ($148,173.30) from 157 million won ($121,162.54), while that of households heads aged 40 to 59 grew by 65% (159 million won or $122,706.01) to 403 million won ($311,009.58) from 244 million won ($188,303.57).

Youth unemployment rate peaked in 2018 and then declined slightly. Their employment rate has steadily declined since 2017. Even if young people land a job, unconventional employment, such as part-time gig and platform work, is expanding sharply making it harder for the country to accumulate human capital.

Other elements that increase young people’s need for asset building include the deteriorating fiscal condition, dwindling social security funds, as well as demographic and household structural changes. As for life expectancy by year of birth, it rose steeply from 62.3 years in 1970 to 76.0 years in 2000. A longer life expectancy means a greater need for asset building.

Fragile social and economic conditions delay young people’s transition toward independence, marriage, or childbirth. As the share of one-person household increases, mutual aid within a household frays. Meanwhile, it is expected that the National Pension Fund would be depleted more than a year ahead of the previous projection, putting further pressure on young people to build assets.

Through the Youth Leap Account savings program, the government will contribute to the savings of qualified Koreans aged 19 to 34 with individual income below 60 million won and with a household income below 180% of the median income for a household. According to the recent national budget plan, the Youth Leap Account will likely be a 5-year maturity product whereby whenever an account holder puts 400,000 to 700,000 won ($308.69-$540.22) a month in the account, the government will contribute up to 6% of the account holder’s savings.

Various other programs are already in place to promote young people’s savings. These include Youth’s Savings Account for Tomorrow (managed by the Ministry of Health & Welfare) that targets low-income young people, Benefits for Tomorrow (Ministry of Employment & Labor) that aids job landing with small and medium-sized enterprises, Youth Hope Savings (Financial Services Commission) that targets mid-to-low-income young people, and many others managed by the Seoul Metropolitan Government and other local governments. Compared with the Youth Leap Account, their maturity is only between 10 months and 3 years.

Initially, the Youth Leap Account was designed to have a 10-year maturity to save up to 100 million won ($77,015.49), but while the budget was being drawn up, the scheme was revised to a 5-year product that saves up to 50 million won ($38,508.07).

Implications

The Youth Leap Account program must ensure equity and fairness among participants to be successful. Its regulations must be specified to ensure consistency and to clarify its relationship with other similar savings programs. Although specific implementation plans have yet to be completed, the amount of savings and government contribution must be set properly in consideration of an account holder’s income level so that the scheme is not abused. A person must have income from either work or business to qualify for the Youth Leap Account. Limitations must be defined as well to prevent excessive savings relative to the account holder’s income. Likewise, proper penalty must be imposed in case of breach of the program’s terms.

When Youth Hope Savings was launched in 2022, young people showed a strong preference for short-term savings products. Efforts are therefore needed to encourage young people to make long-term savings. Extending the maturity period along with an increasing ratio of government contribution if the program maintains a stable participation rate after its launch are possible variations.

Considering that similar savings products have varying purposes, having a regulatory body will help ensure consistency across different products. This will also help maintain the quality of support to account holders.

If funds from the Youth Leap Account can be invested in areas that create jobs and stabilize employment, it would help build a good job market ecosystem for young Koreans.

Resources

Soonho Lee
Senior Research Fellow, Banking and Insurance Industry Division, Korea Institute of Finance

His research areas are economics theory, auction theory, industrial organization, and consumer credit. He obtained his bachelor’s and master’s degrees in Economics at Seoul National University, and his Ph. D. in Economics from the University of Illinois at Urbana-Champaign. He has worked as research assistant at US-based National Bureau of Economic Research.

Korea Institute of Finance (KIF)

The Korea Institute of Finance provides expert analysis for the development of the Republic of Korea's financial sector and financial policy.

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