Advantages of an aging society
Positive and negative forces coexist when a society evolves, but whichever is more prominent gets more play in the news. It’s well-known that Korea is an aging society, but the downsides of this have become so emphasized that we no longer see potential positives.
An aging society amasses much of its assets. Korea at the onset of an aging society has 1,000 trillion won ($834.9 trillion) in reserves at social and private pension plans. If they are used well, we need not fear the day when seniors make up the bulk of the population.
For instance, 10 trillion won at 2 percent annualized interest can become 72 trillion won over the span of a century. If the same amount is managed at a yield of 5 percent over the same period, it would surge to 1,310 trillion won. The difference is as much as 18 times, or 1240 trillion won. The bigger the initial assets are, the greater the value would be. If the starting assets are 1,000 trillion won, the difference in riches from managing the funds at 2 percent and 5 percent yields would amount to $120 trillion a hundred years later. If $120 trillion a century later is estimated at current value, the value would be around $170 trillion. Considering Korea’s nominal gross domestic product is currently at 1500 trillion won, about 11 times greater wealth would be added.
There is a huge difference in accumulated wealth from savings or investments yielding 2 percent and 5 percent. Enhancing efficiency in asset management therefore could be crucial for our society as the economy no longer is expected to run at a fast pace.
The government has become proactive in pension management, but there must be more radical change in the investment system.
First, the industry should become more aggressive. Financial institutions advise customers to be more adventurous with their assets but they themselves avoid risky investment. Bond-holdings by securities companies surged to over 150 trillion won last year, from 70 trillion in 2009. Insurance companies also boosted bond-holdings to 300 trillion won from 70 trillion over the last 10 years. Overseas investment remains pitifully low. Sovereign wealth funds including China have been hunting for good investments around the world since the global financial crisis. In investment, we need to be adventurous and pioneering.
Second, financial institutions need to bolster infrastructure in managing customers’ assets. They must globalize their portfolio, which is overly restricted to assets at home. Overseas investment also is limited to a select number of countries. With such restricted focus and conservative management, the vast world market could become out of our reach. Risk inevitably follows investment. Investment without the backup of necessary infrastructure could be disastrous, as we experienced back in the late 1990s. The infrastructure must be reoriented towards global investment.
Third, the investment market should be thought of as a Formula One race. Carmakers rush to turn out innovative cars to take part in the highest-class auto racing competition that requires racers to reach speeds of up to 360 kilometers per hour (224 miles per hour) with engine performance of maximum 15,000 RPM. Large companies have become stable in the American asset management market while hundreds of smaller hedge funds vie and lose in the fierce race to bolster the dynamism of the market. The market must be fully liberalized so that numerous players can test their skills and ideas to allow creative destruction and innovation to take place.
Finally, investors should change their mind-set about asset management in an aging society. Investments are better than savings for long-term asset management. Korea is too impatient with its investments. Yale University has been the most successful in asset management. For 20 years until 2014, its fund yielded 14 percent. In 2011 and 2014, the yield was 22 percent and 20 percent, respectively. But in 2009, it generated negative yield of 25 percent. The society must be patient and tolerant of ups and downs in investment, and needs to be farsighted. The light does not come out by removing the dark. When light is created, it can prevail over the darkness. We must work towards generating positive energy from a fast-aging society. Investment is the best plan. It could be the best legacy we can leave for our future generation.
Translation by the Korea JoongAng Daily staff
JoongAng Ilbo, Jan. 15, Page B8.
*The author is the director of Mirae Asset Retirement Institute.
by Kim Kyung-rok