Planning and Budgeting in Social Welfare John M. Kim Center for Fiscal Analysis Korea Institute of Public Finance

John Kim / KIPF2 Outline Overview of Korean welfare budget Nature of welfare spending Welfare planning as forecasting Planning vs. budgeting

John Kim / KIPF3 1.Overview of Korean Welfare Budget Growth of Welfare Budget (tr. won, % ) Welfare Budget GDP Ratio Welfare Growth GDP Growth

John Kim / KIPF4 1.Overview of Korean Welfare Budget Composition of Welfare Budget (% of GDP) Public Pensions Health Insurance Unemploymt. & Indust. Accidents Assistance to Needy

John Kim / KIPF5 1.Overview of Korean Welfare Budget Factors Underlying Welfare Spending Growth  Population aging Public pensions Health-care spending  Deteriorating income distribution Transfers & training for disadvantaged  Korea faces “rich-country” problems, but without the “riches” to cope yet

John Kim / KIPF6 2. Nature of Welfare Spending Technology Development & Economic Growth Infectious High Extended Informal Chronic Low Nuclear Formal Diseases Birth & Death Rates Population Age Structure Family Type Support Networks

John Kim / KIPF7 2. Nature of Welfare Spending Technology Development & Economic Growth Public Health Sanitation Hospitals Medicine Nutrition Short-term Planning & implementation Social Insurances Pensions Health Care Unemployment Social Assistance Long-term Forecasting Welfare Programs Welfare Budgeting Korea

John Kim / KIPF8 3. Welfare Planning as Forecasting Threats to Stable Fiscal Management: Social & political pressures in late 1990s forced very large and unforeseen jumps in welfare spending To restore stability to fiscal management: Better forecasting of welfare needs & costs (MTEF) Avoid large sudden shifts in intersectoral resource allocation by anticipating welfare requirements Top-down approach to budgeting Enforce spending envelope and improve predictability Delegate details of social welfare management

John Kim / KIPF9 3. Welfare Planning as Forecasting

John Kim / KIPF10 3. Welfare Planning as Forecasting Dual nature of long-term forecasts Projections: Best guess, ensuring needs are met (MTEF) Spending ceilings/targets: Allocation decisions (Top-down) Welfare Sub-sector Sub-projections Involved in Forecasting Policy Decisions Pensions Population by age & sex Economic growth Retirement, etc. Pension scheme (contributions & benefits) Health Care Incidence & cost of illness LTC Coverage Assistance to Needy Income distribution by HH size Household composition (size, age structure) Extent and level of assistance

John Kim / KIPF11 4. Planning vs. Budgeting Different Pressures on Welfare Budgeting Long-term pressures driven mainly by pensions and health care (may approach 20% of GDP by 2030) Immediate pressure from low-income and disadvantaged groups for more social assistance

John Kim / KIPF12 4. Planning vs. Budgeting Reconciling Long-term Projections and Annual Budgets Old approach: Line-item, bottom-up, incremental budgeting (full control) New approach: Top-down, incremental budgeting (partial control) Different from full autonomy: Top-down, program-oriented budgeting with autonomy within spending envelopes (programs)

John Kim / KIPF13 Final Remarks Need to improve capacity for long-term policy analysis (at least several decades) Hampered by lack of both analytical techniques and extensive, detailed statistical data on socioeconomic and biomedical factors Referring to other countries’ experiences may be second-best alternative Korea’s welfare spending in 2030 will be roughly equivalent to OECD average circa Caution: population aging and welfare growth can be quicker than in “forerunner” countries

John Kim / KIPF14 Supplement: Population Aging in Korea

John Kim / KIPF15 Supplement: Gini Index for Korea