The research conducted by the Bank of Korea suggests that the Earned Income Tax Credit (EITC) can have significant long-term effects on increasing the income of low-income workers, potentially doubling the income effect compared to just cash support. The study indicates that if low-income workers view these benefits as increasing their pension income and extending their working periods, it could help mitigate poverty in old age. The EITC, which serves as an alternative to the minimum wage system, aims to support low-income households and encourage labor market participation.
According to the research titled “The Long-Term Effects of the Earned Income Tax Credit” by the Bank of Korea, when considering only the EITC, the total labor income is estimated at 11.63 million won. However, when pension income and extended work periods are factored in, the total labor income is estimated at 23.05 million won.
Chun Dong-min, a model forecasting team manager at the Bank of Korea, conducted a quantitative analysis using a structural model over the lifecycle of EITC beneficiaries. The EITC is a work-related income support system aimed at supporting low-income workers or business owners who find it challenging to make ends meet despite being employed.
Chun explained that, with EITC support, low-income workers participating in the labor market see an increase in public pension benefits. He described the pension benefits as “dynamic return,” which increases according to the total contributions made to the pension system during pre-retirement labor market participation.
If EITC recipients recognize the increase in pension benefits, they might anticipate future income growth, leading to greater motivation to participate in the labor market. The expectation of increased future income from pension benefits could enhance current consumption capacity, encouraging them to work longer.
In a model considering the effects of dynamic return, including increased labor market participation periods, the expected labor income, including tax credits, post-tax income, and pension income, amounted to 23.05 million won. In contrast, a model that considered only EITC receipt without these additional effects calculated labor income at 11.63 million won.
Chun emphasized that the EITC can contribute to reducing old-age poverty in the long run by linking with public pensions. Providing information on dynamic returns, such as increased pension benefits, could significantly aid in promoting consumption and improving welfare.
According to statistics released by Statistics Korea, as of 2023, the relative poverty rate of the retirement-age population (aged 66 and above) in South Korea is 39.8%, the highest among major OECD countries. The pension receipt rate among the elderly stands at 90.9%, with an average monthly receipt amount of 695,000 won.