The elderly in South Korea are the most financially vulnerable, with those in their 60s and above facing the highest household debt burden among 15 advanced nations, according to a think-tank.
Those in this age group had a debt-to-income ratio of 161 per cent last year - higher than the average of 128 per cent across all ages, said the Korea Development Institute (KDI) in a report released yesterday.
Comparing figures in 15 advanced countries, including the United States and Germany, the report also said that South Korea is the only country where the elderly shoulder a higher debt-to-income ratio compared with other age groups.
Years of paying for their children's private tuition fees and marriage costs appear to have left the older generation high and dry, and the situation is exacerbated by the country's poor pension system that leaves retirees with unstable and inadequate income once they leave the workforce.
Household debt hit a high of 624.8 trillion won (S$762 billion) last month, up from 562.3 trillion won in January, according to the Bank of Korea (BOK).
The BOK has been cutting its benchmark interest rate since August last year in a bid to reinvigorate the flagging economy, and the rate has remained a record low of 1.5 per cent for five consecutive months.
This low rate has made it easy for people to keep refinancing their housing loans, sometimes beyond retirement, said KDI researcher Kim Ji Seob, who spent almost three months to complete the report.
Unlike in the US and Singapore, where homeowners take 20 to 30 years to fully repay a housing loan, usually before retirement, he said the situation in South Korea is such that loans must be repaid within two to three years. As people are finding it increasingly difficult to repay within such a short time frame, they will take up a new loan to repay the current loan, and the vicious circle continues until they retire.
But this means debt burden increases with age.
"South Korea has a bullet-type mortgage system whereby households take up loans and repay only at the end of the contract," he said. "It was sustainable when housing prices were going up and people found the value of their net asset to be increasing. But housing prices are now stable and the debt could become a problem."
It does not help that Korean salaries have a very small pension component - only 9 per cent for the National Pension Scheme, which experts say is insufficient and results in income instability for retirees.
Stable sources of income, including pension, make up only 29 per cent of total income for retirees, a far cry from 70 per cent in Germany and the Netherlands, KDI said.
Many retirees are also cash-strapped, said Mr Kim.
South Korea's household debt to total asset ratio is 0.74, the highest among the 15 advanced nations where it ranges from 0.1 to 0.5.
To curb mounting household debt, the government has introduced measures to tighten loan requirements since July. As these have yet to prove effective, economists are calling for more active efforts to control burgeoning household debt.
In his report, Mr Kim included two recommendations to tackle the problem. The first is to adopt a long-term loan structure and allow borrowers to repay their mortgage over 20 to 30 years, ideally before retirement.
The second is to introduce "reverse mortgage", which will allow homeowners to unlock some equity from the bank using their house as collateral. Singapore has a Lease Buyback Scheme for four-room or smaller Housing Board flats.
"It is hard to sell a house and transaction costs are high," said Mr Kim. "Reverse mortgage allows you to get steady income until you die, and the remaining money from the asset can go to your children."