Ebook Financial Implications of Social Security Reforms in Japan
As in other OECD countries, public pension insolvency is now one of the most serious problems that an aging society poses for the Japanese economy. The proportion of people aged 65 and above – 17.4 percent in 2000, which is close to the OECD average is expected to grow faster than in any other advanced country. The latest official population projections, published in January 2002, expect the share of elderly to rise to 28.7 percent in 2025 and 35.7 percent in 2050. These projections assume that the fertility rate will remain low at 1.39 by 2050, expecting no substantial recovery from 1.33 in 2001.
Rapid population aging is a big challenge to the sustainability of the social security system, which relies heavily on future generations. Under strong demographic pressures, the government announced a new pension reform plan in 1999 and has implemented it since April in 2000. Since Japan’s public pension program is basically a pay-as-you-go system, the government must reduce benefits and/or increase contributions in order to keep the programs financially sustainable. To finance pension benefits promised in the previous 1994 Reform, the contribution rate must eventually increase to 34.5 percent, which seems unacceptable. The 2000 Reform thus incorporates measures to hold down the burden on future generations by making eligibility conditions and benefit schemes less generous than previously scheduled.
Still, the chance that the latest reforms will fail to solve insolvency problems is very high, since they are still based on seemingly overestimated population growth and rosy macroeconomic forecasts. Indeed, several analysts show that the public pension fund would be exhausted by 2050 even with several changes called for by the 2000 Reform. Net pension liabilities are estimated to be 550 trillion yen, about 108% of net GDP, at the end of fiscal year 1999 and will probably keep increasing. The Japanese government will most likely be forced to reduce pension benefits again at the next round of pension reforms, due in 2004, when the current assumptions will have proved too optimistic.
It should be noted, however, that the typical approach to the financial liabilities often ignores the effect of policy changes on labor supply of elderly people. It is important to understand retirement incentive effects in order to assess the full impact of pension reforms on the financial liabilities of the systems. Those effects will be critical in Japan, since postwar baby-boomers will become eligible for public pension benefits in the next few years. The reform that raise labor supply among the elderly can improve the fiscal position of the social security system and other public sector, but the fiscal implications will depend much on the provisions of the system.
This paper aims to illustrate how social security reforms affect the financial balance sheet of retirement income systems through a change in retirement decisions by elderly workers. The reforms considered in this paper are chosen for the purpose of cross-country comparisons and are not proposed as desirable or politically feasible in Japan. It should be also noted that the reforms are being compared to the pre-2000 Reform system, not necessarily to a solvent system.
The structure of the paper is as follows. Section 2 provides a brief picture of retirement programs in Japan. Section 3 presents the base model used for analysis. Section 4 describes the simulation methodology and issues that arise to Japan. Section 5 presents simulation results and discusses their policy implications. Section 6 concludes.
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