Officials from banking and other financial institutions were at stations and bus terminals across Seoul over the weekend to hand out brochures promoting various savings products to citizens heading for their hometowns to spend the Lunar New Year holidays.
It was the first savings campaign in more than three decades. Considering the country’s savings rate has remained at the lowest level among the world’s major economies, the campaign should have come earlier. But most of the people approached by campaigners were probably far from ready ― or more commonly, able to afford ― to save more money.
What made the campaign somewhat controversial was the cause of the low savings rate ― generally believed not to be excessive spending but a prolonged economic slowdown, which has eroded household income while household debt has ballooned. Faced with the heavy burdens of repaying mortgages and paying for children’s private tutoring, many working-class families simply cannot afford to save. Figures from the government and the central bank showed household debt amounted to 937 trillion won ($856 billion) last year, accounting for more than 80 percent of the country’s gross domestic product.
This situation, however, should not be allowed to dash out the need for efforts to push up the declining savings rate. A report released by the Organization for Economic Cooperation and Development in 2012 revealed that Korea’s household savings rate ― the ratio of savings to total disposable income ― decreased at the steepest pace among its member states over a decade since the foreign exchange crisis in the late 1990s. The country saw the rate, which stood at 23.1 percent in 1998, plummet to 3.1 percent in 2011, far below the figures for France with 16.8 percent, Germany with 11 percent, Britain with 7.4 percent and the U.S. at 4.7 percent. Before plunging to single digits in the 2000s, the nation’s household savings rate retained the world’s top spot for 13 years since 1987, reaching a record high 25.9 percent in 1988.
Measures need to be worked out to shore up the continuous decrease in the savings rate, which could eclipse growth potential and damage macroeconomic stability. A study by a local research institute estimates that a 1 percentage point reduction in savings rate would hold back economic growth by up to 0.15 percentage point.
The savings campaign over the weekend might have been meaningful in that it drew the public’s attention to the nation’s low savings rate, which is likely to slide further for years to come with household debt continuing to increase and the population rapidly aging. But it may be naive and unrealistic to expect substantial results from just handing out brochures offering information on some savings products with tax benefits.
The campaign should not end in a one-time show-off event, but must be followed up with effective policy measures that offer more incentives to save and, more fundamentally, help working-class and low-income families earn more money. Consideration may be given to providing some matching grants and expanding tax benefits to encourage savings by less-privileged households. Efforts need to be strengthened over the long term to reduce costs for private tutoring, stabilize prices and induce corporations to make more investment and hire more employees.
The incoming administration, which is inaugurated later this month, should prove capable of reversing the downward savings trend to prevent it from bogging down the economy.