South Korea may be getting too old to take advantage of its AI boom

South Korea, a major player in the AI boom, is facing potential economic challenges due to its rapidly aging population. Home to tech giants like Samsung Electronics and SK Hynix, the country boasts thriving memory chip manufacturing industries and a robust KOSPI index. However, a Goldman Sachs report suggests that this wealth may not translate to ordinary households.

Despite soaring exports and factory investment, retail sales remain stagnant, mirroring a "K-shaped cycle" where corporate balance sheets flourish while private consumption struggles. At the heart of this issue lies South Korea's low fertility rate, which has plummeted to 0.8 births per woman, far below the replacement level of 2.1.

Twenty percent of the population is now over 65, and the country's dependency ratio, measuring the ratio of dependent individuals to working-age individuals, is projected to increase by 1.5 percentage points annually over the next decade. This surge in dependency is particularly troubling, as older Koreans exhibit unique spending habits.

Unlike their counterparts in Japan, Taiwan, and the U.S., Koreans in their sixties and seventies tend to save more than they consume, retaining a substantial portion of their income. Moreover, over 60% of Korean household net worth is invested in non-financial assets, such as real estate, with financial assets accounting for only 100% of the country's 2024 GDP.

This asset-rich, cash-poor situation leaves retirees with limited options to bolster consumption during income declines. Unlike in Taiwan, where households have a financial cushion equivalent to five times the GDP, Korean retirees are hesitant to liquidate their housing wealth, given the strong desire to pass assets onto their heirs.

As Korea's population ages, the propensity to save could hinder spending, leading to a significant drag on growth. Goldman economists estimate that the aging population could shave up to 25 basis points from annual consumption growth over the next decade, potentially turning it negative if growth remains at 2%. While the country has attempted policies to boost birth rates, such as marriage grants and matchmaking events, these efforts may not yield immediate results, as the newborns will not enter the workforce for at least two decades.

Instead, Goldman suggests that South Korea explore more immediate solutions, such as unlocking housing wealth among the elderly and redistributing the profits from its thriving tech firms.