The gap in financial assets between rich and poor is getting wider. In particular, as the era of low interest rates ends and stock prices jump, the financial-asset gap is widening the income gap and vice versa, with the two locked in a vicious cycle.

According to the National Statistical Office’s household income data, released on Sept. 9, the upper 20 percent earned 5.04 percent more than the bottom 20 percent during the second-quarter of this year. Using a standard that includes financial assets, such as interest and dividend incomes, the ratio ballooned to 8.12 times.

In other words, the financial-asset gap is prompting the income gap to get wider. When you calculate the amount of savings by five income groups based on the statistical office’s 2006 data for household assets, the gap between the upper 20 percent and the bottom 20 percent was 7.24 times greater as in May of last year. Under the criteria, the amount of savings encompasses all financial assets, including bank deposits, stocks and bonds, but excludes cash deposits for home rentals. Though there were some differences in the criteria, the ratio was 5.34 times greater in 1996 and 6.69 times greater in 2000. Over the past decade, it showed the financial-asset gap was significantly widening.

In particular, when interest rates and stock prices rose, the financial-asset gap gets wider at a faster pace. According to the Bank of Korea’s data, the net interest income of households was 14.23 trillion won (US$15.13 billion) in 2005. The figure rose to 14.93 trillion won last year. The reason: low-income households paid more interest payments due to a rise in interest rates and high-income earners saw their assets climb, backed by the rise in interest rates.

Professor Cho Bok-hyun of Hanbat University said, “Though the government has said the pace of the uneven distribution of wealth is easing, citing the GINI coefficient or the ratio of five-group income, but it’s inappropriate. The government should pay attention to the widening increase in the financial-asset gap,” Cho said.

Experts say that the government must step up its efforts to map out policies that will assist low-income households to build financial assets. Yoo Gyeong-won, a manager at the Bank of Korea’s finance and economic research center, said, “To help low-income households build their financial assets, South Korea needs to introduce the Individual Savings Account system, which has been implemented by many advanced nations.”

The ISA system allows the government to provide a certain amount of money to low-income households when they deposit money into the account. Currently, the Ministry of Health and Welfare uses a Child Development Account system, which gives 30,000 won to low-income families that save 30,000 won per month. The effect, however, is minimal because the aid is largely insufficient.

To ease the pace of the ever-widening financial-asset gap, experts advised the government to amend related tax laws. Professor Cho said, “In fact, there is virtually no way to reduce the inequality of financial-asset distribution, with the financial market becoming bigger and bigger, except for taxes on financial assets. It’s time for the government to seriously review how to amend capital income tax laws, such as taxes on profits from stock transactions.”

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