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Shifting the burden of ageing in Japan

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In Brief

The demographics of ageing are not all doom and gloom. They also open up economic opportunities. In Japan, where retirees have high average wealth and life expectancy, there is an opportunity to develop new products targeted to the elderly and to expand ‘silver’ markets.

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A decline in the number of workers opens up working opportunities for those who would otherwise retreat from the labour force, such as women and elderly individuals, giving policymakers more incentive to invest in human capital and health so that people can work and live longer.

Ageing itself is not the cause of Japan’s fiscal pressures. It is the country’s unfunded transfer welfare system, coupled with an unstable population pyramid, that is so problematic. These factors could stifle the economy for years to come unless the government takes action soon.

The total fertility fate — the average number of children that each woman has over her life cycle — has to stay close to 2.1 to prevent the population from falling. The Japanese fertility rate was above 3 in the early 1950s, but in the past four decades it stayed well under 2 and has settled below 1.5 since the mid-1990s. According to official projections by the Japanese National Institute of Population and Social Security Research, fertility rates will stay below 1.4 until at least 2060.

Thanks to medical advances, life expectancy has risen by about 30 years since the 1950s and is projected to continue to rise in the coming decades. As a result of low fertility rates and rising longevity, the old-age dependency ratio — the number of people aged 65 and over divided by the number aged between 20 and 64 — will grow rapidly. In 2010, it was below 0.4. By 2050, the ratio is expected to rise to over 0.8, the highest level among OECD economies.

The Japanese pay-as-you-go public pension and health insurance systems will not be sustainable unless there is a sizeable increase in taxes or a major reduction in benefits. Various quantitative studies have found that revenues equivalent to 30–40 per cent of total consumption could be necessary for Japan to maintain these two programs at their current levels. Such high tax rates are not likely to be politically feasible, at least for the foreseeable future.

Many Japanese, younger people in particular, are pessimistic about the future of the public pension system. Very few young Japanese expect to receive an equivalent level of benefits to those that current retirees receive. To many, it seems certain that current benefit levels are the highest Japan will see for several decades. What is uncertain is when social security reform will take place and how dramatic the adjustment will be.

In a recent study, I built an economic model to study the impact of likely reforms to ensure the social security system is sustainable, in which the government reduces pension benefits by 20 per cent and progressively raises the normal retirement age from 65 to 68 over a 30-year period. This would stimulate the economy and bring about a major boost to the government’s budget. People would be more motivated to work longer, while saving more, if less was expected to be provided by the government after retirement age.

Delayed implementation of these reforms would mean that the fiscal costs associated with ageing will shift towards future generations. It is predicted, for example, that a delay of two decades would lower output by up to 4 per cent and raise the tax burden by more than 8 per cent of total consumption. Lower economic activity implies lower wages for future generations. If Japan delays reform and continues to push back the task of consolidating the welfare system, younger people will be made far worse off.

If Japanese voters only think about current generations’ benefits and tax rates, it will be hard for any reform agenda to receive majority support. Japan could keep borrowing against the future until no one is willing to lend or until the debt explodes and a default is declared.

But if Japan cares about the wellbeing of its children and grandchildren, delaying reform for as long as possible is the worst available choice. Today’s policy choices will have a major effect on what Japan will look like in a few decades’ time.

Starting with the most recent national election in July, the voting age was reduced from 20 to 18. Although this suggests that Japan is interested in the concerns of the young and, perhaps, of future generations, this amendment won’t change political outcomes by itself. Whether the government chooses a policy that is fair to future generations will be determined by how Japan’s voters weigh their own wellbeing against those who are yet too young to vote.

Sagiri Kitao is Professor at the Department of Economics, Keio University, Tokyo.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Reinventing Japan’.

3 responses to “Shifting the burden of ageing in Japan”

  1. How easily the author writes of reducing SS benefits by 20per cent over the next 30 years. Does he not realize what an impact that would have on the lifestyles of the recipients!? There are people with lives behind these numbers, you know!!

    No mention of efforts needed to raise the birthrate. Or of the need to make it more worthwhile for more married women with school aged children to work full-time by helping them earn more equal wages than they do now. Or, heaven forbid, to increase immigration to add productivity to the economy.

    Per the reading I did, the inclusion of 18 year olds in the last election benefitted the LDP. Ie, these younger people turned out to be as ‘don’t rock the boat’ conservative as their elders.

    • I didn’t see the author talk about putting the Lost Generation back to work considering the fact that many of them were unable to get work during the recession of the 1990s.

      I agree with you Richard. Too many people with business, law, accounting, and economic degrees have these outlandish, useless theories that if you cut benefits and wages the economy will turn itself around. They don’t talk about cutting the prices of goods and services which would also turn the economy around. They always seem to forget or don’t add to that part of the equation if you want to turn the economy around.

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