In the recent decade, the volume of the household debt in Korea has been continuously increased. It is known to have some positive effects on the household behavior, especially liquidity constrained households. For these households, household debts can be another source of income, and can be used for consumption expenditures for daily life and/or for paying housing rents.
For those who have good credits with high income sources, additional real estate might be obtained by creating new debts. This kind of behavior was the source of bi-polarization and deterioration of income distribution in the past. For the poor income group, it is necessary to provide then with a good job.
In order to reduce the level of household debt, it is advised to stabilize housing prices, otherwise the default risk of mortgage loans will be high.
According to the existing literature, our social assistance system has quite limited effects in reducing absolute/relative poverty. Due to the immaturity of public pension system, the effect of public pension on income support for the old is also limited. The most desirable thing is to develop a decent policy instrument that can reinforce the share of middle income class by increasing income mobility.
Unfortunately, household debts in Korea seems to be sustained at least for the near future and the policy options are also limited.
The ultimate consequence of sustained level of household debts will be the deterioration of income redistribution and thus the huge amounts of expenditures on social safety net has limited effects as an anti-poverty policy instrument. Furthermore, external shocks such as declining housing prices due to the ageing and/or decreasing in the size of total population will be a disastrous problem in the Korean economy.
The government needs to manage the magnitude of household debts at the current level. The housing price supporting policy looks effective for the shout run. but it has serious negative impacts on the overall economy in the medium-run. We need to keep in mind that the sustained housing debts accumulation will nullify the social safety net and anti-poverty effects in the future.
The policy option to increase the income mobility will be the most promising alternative for both strengthening the middle class and alleviating the old-age poverty.