Aging of the population in Japan and its implications to the other Asian countries

SYMPOSIUM

Aging of the Population in Japan and Its Implications

to the other Asian Countries

NAOHIRO YASHIRO

The speed at which Japan’s population is aging is mainly a result of its rapid economic development, which is common to many other East Asian countries. Two aspects of the aging of the population are an increasing share of the elderly and a declining labor force. The larger the number of elderly, the more the transfer of income between generations, and the fiscal burden rises. The shrinking workforce will lower the economic growth directly, and indirectly through the falling saving ratio. However, the negative impacts from aging can largely be offset by stimulating participation of older persons in the labor force. Additional labor not only contributes to increasing the potential growth of the economic activities, but also improves the fiscal balance. Appropriate policies which encourage the better utilization of human resources will lower the burden arising from an aging population.

I.

INTRODUCTION

Aging of the population is a major long-term concern as it relates to the Japanese economy and society. While aging is a phenomenon common to many industrial economies, the most striking feature in the case of Japan is the high speed at which the process is occuring. The labor force is projected to decline in the 2 1st century with falling fertility and increasing retirees. Household savings, which finance capital accumulation, are likely to decline with the higher ratio of elderly who withdraw their savings for their retired life. An increasing shortage of both labor and capital will be a major factor for the deceleration of the expected growth in Gross Domestic Products (GDP) and per capita income. Naohiro Yashiru * Institute of International Relations, Sophia University 7-1 Kioicho, Chiyodaku, Tokyo 102, Japan; Fax: 81-3-323% 3592; E-mail: [email protected] Journal of Asian Economics, Vol. 8, No. 2, 1997 pp. 245-261 ISSN: 1049-0078

Copyright 0 1997 by JAI Press Inc. All tights of reproduction in any form reserved.

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JOURNAL OF ASIAN ECONOMICS 8(2), 1997

The share of the elderly in the total population is projected to rise steadily from 14.8 percent in 1995 to 27.4 percent in 2025 when the postwar baby-boom generation reaches age 75, and rising further to 33 percent in 2050. The speed of aging of Japan is much higher than the other OECD countries, which is closely related to its past swift development (Figure 1). This is also common to Germany and Italy, and the other East Asian countries in near future. Demographic changes affect both macroeconomic and fiscal developments. The larger the share of the elderly becomes, the more inter-generational income transfers are incurred, and the burden of the working generation increases. Thus, the working generation will suffer both from the lower income growth and the higher tax increases financing Social Security. There is already a growing pessimism that the living standard of future Japanese generations will be worse-off than that of the current generation because of deteriorating living standards arising from population aging. Nevertheless, the increased burden caused by the aging of the population is not inevitable. Longevity, a major factor for the aging of the population, is the result of increasing per capita income and improving medical care services, thanks to the country’s successful economic development. That the average person can live longer usually means that he can also work longer. Thus, if a certain portion of the elderly postpone their retirement, the labor force will increase and the average household saving ratio will rise, thereby higher economic growth will be acheived. In addition, both the increase in the number of the contributors and the decrease in the beneficiaries will improve the Social Security balance significantly. Reversing the trend of earlier retirement is a major key to coping with the aging of the population. Below we first summarize falling fertility and longevity, which are major factors underlying the rapid aging of Japan’s population, and explore prospects for future trends. Second, we make labor market projections through the Year 2050, the second peak of the aging, where changes in the participation ratios of women and older persons are particularly important. Third, we investigate the macroeconomic effects of population aging, discuss the fiscal impacts of an aging population-focusing on public pensions and health insurance-, and end by examining possibilities for reducing the excessive burden of the working generation in its support of the elderly. Also, we offer some recommendations concerning fiscal policy options.

II.

MAJOR FACTORS BEHIND JAPAN’S RAPIDLY AGING POPULATION

Although the share of the elderly in the total population is growing in many developed countries, the most striking feature of this phenomenon in Japan is the high speed at which it is occuring. The reasons are closely related to Japan’s swift economic development, which has triggered rapid social changes.

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A. Fertility Trends Japan’s fertitlity ratio fell sharply from 4.5 in 1947 (the postwar baby boom) to 2.1 in the 196Os, and to 1.42 in 1995.’ The initial postwar decline in the fertility ratio was mainly due to a fall in the average number of children per family, reflecting a shift from the agricultural to the service sector, and the migration of the population from rural to urban areas. In contrast, the decline in fertility that has taken place from the early 1970s to the present has been mainly attributable to their rising enrollment in colleges and resulting expanded job opportunities. The higher earnings women receive, the more costly for them to quit the good job becomes. Thus, so long as there is a trade-off between marriage and child bearing on one hand and pursuing job career on the other, the women’s age of the first marriage would continue to rise. Besides, the smaller number of children per family by itself stimulates households’ investment in women’s college education, and thus, creating the possibility for a vicious circle between the fertility decline and women’s higher education. This self-genrating process of fertility declining, if not prevented by policy measures, is likely to continue in the near future. An effective policy to counter the trend of fertility decline is to provide nursery services, reducing the trade-off between child-rearing and womens’ continued attachment in the labor force.

B. Longevity Another reason for Japan’s increasingly large elderly population is that Japan has the highest life expentancy of all major indust~al countries. Average life-expentancy for males has increased from 50.1 years in 1947 to 76.4 years in 1995 and for females from 54.0 years to 82.9 years during the same period.’ Initially, increased life expenctancy was due to a sharp fall in the mortality rate among children under one year old-thanks to improvements in nutrition and sanitary conditions. Better health care for the elderly has also significantly increased life expectancy at retirement age and beyond. In Japan, average life expected years remaining at age 65 for males and females were 16.5 and 20.9 in 1995, respectively. Increased life expectancy reflects a rapid rise in Japanese average per capita income and medical standards in the postwar period. Also, the more equal distribution of both income and medical services have contributed to Japan’s longest life expectancy in the OECD countries.

C. Future Demographic Trends Demographic projections in Japan are provided by the Social Security and Population Research Institute with alternative assumptions. The Medium Estimate published in 1997, which was based on the fertility trend recovering as from 2000 and stabalizing at 1.6, projects the Japanese population will peak at around 2010, and decline thereafter.

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However, there is a pessimistic view that this scenario, like many previous ones, is not plausible. It is mainly because the pace of an increasing women’s college enrollment ratio accelerates recently, and their majoring fields become more close to men’s. Thus, it is unlikely that Japan’s fertility rate will recover soon like those in other OECD countries, unless effective policy measures are taken.

III.

LABOR MARKET IMPACTS OF THE AGING POPULATION

A. Declining Labor Force Growth Falling fertility rates have resulted in declining growth in population. The population of those between 20 and 64 will fall beyond 2000, and the size of the decline amounts to over 1 percent between 2000 and 2050. When labor force participation rates are unchanged, the labor force, which will maintain the increase by 1.O percent (at annual rate, same as below) between 1975 and 2000, will decline by 0.55 percent in the first quarter of the 21st century, and the speed of the decline doubles in the second quarter. Thus, actual developments in the labor force will depend on the extent to which the labor force participation of women and older persons rises, offsetting the declining trend of the population (Table 1). B. Women’s Labor Force Participation The labor force participation of women has risen steadily from 45.8 percent in 1975 to 50.0 percent in 1995. The size of the increase in labor force participation was particularly prominent in the child-bearing age. That of the 25-29 age group rose from 42.5 percent to 66.4 percent in the same period. This is the result of the followTABLE 1. 1980-1990

Macroeconomic 1990-2000

Projections 2000-2010

2010-2020

Population Total

0.5

0.2

0.0

-0.4

15-64

0.9

0.1

-0.6

-1.2

65+

3.4

3.8

2.5

1.7

Total

1.2

0.7

-0.3

-0.5

Male

0.9

0.8

-0.3

-0.7

Female

1.7

0.7

-0.2

-0.2

GDP (1990)

4.1

2.6

1.9

0.5

GDP/Labor Source: Yashiro

2.9

1.9

2.2

1.0

Labor Force

Note:

and JCER (1995).

Average growth at annual rate. %

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ing factors: The ratio of unmarried women has risen, reaching close to 50% percent in 1995. These women have an average higher labor market attachment than married women. The falling trend of marriage ratio of women is closely related to their rising college enrollment. The participation of married women has increased with fewer number of children and shortened working hours. The trend of women’s higher participation is likely to continue into the 21 st century. Labor force participation will be even higher if the policy for increasing better day-care facilities is supported, encouraging the mothers’ labor market attachment. A continuous wage increase in the past has also been an important factor stimulating womens’ labor force participation. However, increasing taxes and social security premiums will be a discouraging factor by reducing their net wages after taxes. Care has to be taken, however, that despite the increases in the participation rates in each age group of women, the average labor force participation will still decline by 2050. This paradoxical phenomenon can be explained by the shift of the share of women toward the older age group where participation rates are relatively low. In this sense, the changes in the participation of older persons, of which share is rising continuously, will play a crucial role in the 21st century. C. Older Person’s Labor Force Participation A particular characterstic of the Japanese labor market is a reversed trend of older workers. In Japan, like other OECD countries, the labor force participation of older workers fell until the mid-1980s, at which time the trend reversed itself. Between 1987 and 1995, the ratio of working males age 60 to 64 years in the total population rose from 7 1.1 percent to 74.9 percent, while the share of working males age 65 and above rose from 35.6 percent to 37.3 percent (Figure 2).3 Major factors behind this reversing of the earlier retirement trend were shortening of working hours and more tight labor market conditions, which more than offset the improvement in the pension benefits. The currently high labor force participation of older workers may well be maintained with increasingly tightened labor market conditions, and the continued shortening of working hours. It would be further stimulated by reforms in public pension schemes. The 1994 public pension reform included the increase in the pension eligibility age to 65 and reduction of pension benefits. These changes will affect the labor market participation of older workers. If the earnings-related portion of the pension for the 60-64 age is eliminated, and the pension eligibility age is extended further to 70, labor force participation rates for 60-69 years of age will be further stimulated. Iv.

THE MACROECONOMIC CONSEQUENCES OF AN AGING POPULATION

The extent of the fiscal burden associated with an aging population depends largely on macroeconomic factors. The higher a country’s per capita income growth, the

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in Japan

SLGL

OL61

S96L

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lower the burden of the working-age population for taking care of the elderly. However, the decreased labor force beyond 2000 and the increase in the elderly ratio are likely to have negative impacts on macroeconomic developments in the following two ways. First, household savings are likely to fall as the proportion of elderly rises, resulting in a gradual increase in dissavers as a share of total population. Because Japanese elderly do save significantly, at first glance it may seem that this life cycle hypothesis on household savings may not apply to Japan. However, there are two types of Japanese elderly; those who are economically independent and are likely to save, and those who are dependent on their children-accounting for 65 percent of total elderly. The latter type of elderly are taken care of by their children, and are thus excluded from statistics on a household basis (Yashiro, 1995). If we take this “sample selection bias” into account, Japan’s elderly as a whole do indeed dissave as predicted by lifecycle theory (Yashiro & Maeda, 1993). With the increase in the share of the retired elderly in total population, the household saving ratio will inevitably decline from 13.2 percent in 1994, though the extent to which depends on future trends in the labor supply. Second, the impact of an aging population on investment and labor productivity growth results from counteracting forces. Declining labor force growth may seem to stimulate the demand for labor-saving investment, but in the long-run, business investment may well be discouraged by the falling capital profitability arising from the decrease in the labor supply and higher interest rates associated with declining saving rates. However, this negative impact on investment can be partly offset by labor-enhancing technological development. Past experiences in major OECD countries implies that labor shortage is an important impetus for more efficient utilization of the existing labor force.4 The more efficient use of market forces through deregulatory measures would enhance “technological changes” measured by the higher total factor productivity growth. Thus, Japan’s aging population tends to lower the nation’s prospensities for investing and for saving. How this will affect Japan’s current external balance will depend on the extent of the decline in savings and investment. Although empirical evidence is scant, it is possible that the decline in investment should be slower than that in savings, mainly due to the development of labor-enhancing technology, which is induced by an increasing labor shortage. As a result, an aging population is likely to deteriorate Japan’s current external balance, which is already shown by the previous studies in the Economic Planning Agency (Yoshitomi & Yashiro, 1992) and Japan Center for Economic Research (Yashiro & Oishi, 1993).5 Though economic growth beyond 2000 will decelerate from 3.5 percent average growth during the period between 1970 and 1995, deceleration of growth in per capita income will be less than that of GDP, as the population and labor force declines. The economic growth rate will be lower if technological improvement induced by the tightening labor market conditions is deterred, possibly by the failure of structural adjustments. Also, adequate policy measures for stimulating labor force participation

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in Japan

of women and elderly, the labor supply will be less, and the economic well be choked.

V.

THE FISCAL

IMPACT

OF JAPAN’S AGING

growth may

POPULATION

In many industrialized countries, the major fiscal impact of an aging population is substantial increases in public pension benefits for the retired. Both savings and investment are affected by an aging population due to associated increases in the tax and social security burdens of the working-age population. There is a tendency in the OECD countries for those with a relatively high proportion of elderly to have larger government sectors-measured by the ratio of social transfers or by the tax and social burden relative to GDP Government size expands with an aging population mainly through increased transfer payments, the extent to which differs largely by country or region (Yashiro, 1995). Thus, there is room for policy plans which determine the size of government. Japan’s social security expenditures amounted to 57 trillion yen (15.3 percent of National Income) in 1993. Pension and medical benefits accounted for 5 1 and 38 percent of the total expenditure, respectively. The rest are unemployment and welfare benefits. Social insurance schemes cover public pension, health and unemployment compensations, accounting for over 90 percent of total social security expenditures. Welfare services are financed by the general revenue, but recently, new social insurance covering the frail elderly is under consideration. A. Public Pension Overview of the Public Pension Schemes. Japan’s public pension schemes consist of a two tiered system; one is the basic pension for the self-employed and another is the earnings-related pensions for dependent employees. Both pension schemes were initially designed to be close to “fully funded”, meaning that contributors accumulate their own savings which they withdraw after retirement. Under this system, while both accumulated contributions and benefits per person are relatively low in the beginning, the average benefit per beneficiary increases with time as the average period of contribution becomes longer or the public pension fund becomes more “mature”.6 Under such a scheme, variations in the age structure of the population lead to corresponding variations in the fund’s net assets, thus the aging of the population would be neutral to the inter-generational transfers. However, this “fully funded principle” regarding pensions in Japan has gradually been eroded, and the system has shifted to a de facto “pay-as-you-go” scheme. This means that present beneficiaries are directly supported by present beneficiaries are directly supported by present contributors through premiums which otherwise would be accumulated. This shift is mainly the result of a generous increase in pension ben-

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efits brought about by political pressures-a generosity not bolstered by suffkiently higher premiums in the 1970s. Moreover, premiums had to be paid for the longer period of time due to unforseen increases in life-expectancy of the elderly, discussed earlier,but they were not actually raised high enough to pay the costs. This has been exacerbated by Japan’s low (by international standards) eligibility age for public pensions, which is 60 for males and 55 for females.7 These factors naturally produce a “potential deficit” in the public pension balance-that is, future promised benefits unmatched by future debt accumulationeven though an actual surplus has been accumulated. According to an estimate, the accumulated “potential debt” amounted to 100 percent of GNP in 1990 compared with actual assets of the Social Security Fund, which comprised 20 percent of GDP (Hatta & Oguchi, 1993). This situation has led to a substantial increase in social security transfers between different generations. Indeed, curre.nt public pension beneficiaries, on average, have contributed only 30 percent of the benefits actually received (Takayama, 1992). Consequently, public pension fund reserves will eventually be exhausted before population aging reaches its peak, putting the greater burden on future working generations. Returns for those born before 1965 are higher than contributions, and the costs are to be born by the latter generation (Figure 3). Thus, the current pension

WI 50 Pension

Pension Conb ribul tiOllS

:fits

1

n

FIGURE 3. Source:

Kousei Pension’s Benefits and Contributions (As % of Lifetime Income)

“White Paper on Japan’s Economy 1996”. Economic Planning Agency, 1996.

in Lifetime

Aging of the Population in Japan

255

scheme is not necessarily sustainable, nor is it fair for the current working generation, as the amount of the inter-generational transfers to the retired are proportional to their past earnings i.e., the rich elderly can receive more than the average transfers from the working generation. Wi~out a substanti~ revision of the current system, the size of the inter-generational transfers will automatically increase.

The 1994 Pension Reform. In order to restore the pension fiscal balance and to have adequate reserves even at the peak of the population aging, the public pension scheme was reformed in 1994 in the following ways: (1) The public pension premiums are to be raised from 14.5 percent of regular wages in 1994 to 29.5 percent in 2025s; (2) The statutory age of pension eligibility is scheduled to rise gradually from the current 60 to 65 starting 2001; (3)The pension benefits are indexed not to gross wages but to net wages after tax and insurance premiums being deducted. These measures are meant to restore the equity between con~butors and beneficiaries under a rapidly changing age structure. In the future, current contributors are not sure to have the same benefits which the current retired receive because of declining working population. Both the demographic changes arising from the fertility decline and the deceleration of economic growth imply an increased burden on the working generation. A plan for further pension reform would be necessary to maintain the pension scheme up to the peak of the aging. This plan should raise the statutory age of pension eligibility further beyond 65, with the extension of Japanese life expectancy. Even with the reform, the pension benefits as the share of GDP will continue to rise to 2025. Publie Pension and Labor Supply. As the receipt of public pension is subject to certain income ceilings, the scheme may discourage work incentives for older persons and married women. This may well cause a “viscious circle” between pension and work, because the reduction in the labor supply leads to the higher burden on the existing labor force and the larger distinctive effect. While one can claim pension benefits as early as age 60, receipt of benefits is conditioned on the “earnings test” until the worker reaches the age 65. That is, if one earns more than a certain income floor level, the pension benefits are reduced for each additional dollar of earnings, until at high earnings levels one cannot qualify at all. For example, if an individual earns even a bit, the benefits are automatically reduced by 20 percent. Benefits are reduced for any earnings above 220,~ yen per month by 50 percent for each extra earnings. Benefits are reduced by 100 percent for any earnings above 340,000 yen.” There are various empirical works that the pension benefits lower the labor force participation in this age group (Seike, 1989). Not only the older persons but dependent spouses have a similar discouraging effect. Dependent spouses of pension beneficiaries are eligible for various pension benefits. For example they are entitled to have their own basic pension from age 65 with no additional contributions. This is explained for the protection of dependent

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spouses who are divorced and have no individual pension. Also, surviving spouses receive three quarters of full pension benefits, beginning at age 60. The benefits for dependent spouses are somewhat complicated as wives earn enough so that they have their own pensions. Economically independent spouses are obliged to choose either the survivial benefits or their own pension benefits. This raises equality issues concerning significant differences in lifetime pension benefits between workers having dependent spouses and those who do not. Also, the system may well discourage dependent spouses to work full-time, as above a certain ceiling they have to pay the premiums for Basic Pension otherwise granted. B. Health Insurance In Japan, public health insurance covers both the self-employed and employees, just like the public pension. Also, those elderly who are 70 years and above are covered by the Elderly Health Scheme, to which the government and other health insurance schemes subsidize the payments. Health care comes second after pensions as an important social expenditure, accounting for over one-third of total social security expenditures. Although the size of Japan’s social security transfer payments are still relatively small when compared to many European countries, total medical expenditures including both public and private ones amounted to 7.1 percent of National Income in 1995. In Japan’s health care system, the costs for medical care are directly paid by the government to hospitals and doctors, and the patients are obliged to pay only 10 percent of the fees, thus undermining the real costs. Medical Expenditures for the Elderly. The concentration of public health care services on the elderly is particularly prominent in Japan. Costs of medical care for the elderly (age 70 and above), now account for nearly one-fourth of total health care expenditures. Patients age 65 and above utilize 3.2 times more medical services than the average, making Japan’s gap between average versus elderly use of medical services one of the largest of the seven major OECD countries. This is due, in part, to Japan’s generous health insurance system, which provides nearly unlimited free health care services to the elderly age 70 and above with a certain fixed amount of fees.” The lack or a mechanism for discouraging the demand for medical services is aggravated by insufficient information on prices of medical services, since medical services are directly supplied, absent reimbursements by public health insurace schemes. Another problem is Japan’s relatively large share of drug costs as a proportion of total medical expenditures. l1 This mainly occurs because drug dispensing is encouraged through discounted prices granted by pharmaceutical companies to doctors and hospitals which sell drugs to patients directly.

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257

While the ratio of total medical expenses (both public and private) relative to national income stabilized in the 1980s at 6 percent, the share of elderly medical expenses rose continuously, reaching over 30 percent in 1995. It is likely that medical ex~nditures on the elderly will expand more rapidly in the future with the increase in the elderly population. Such spending will account for nearly half of total medical expenditures in Japan by 2020.

Health Insurance Reform. Health insurance reforms under consideration for reducing the medical costs are the following : First is to reduce the moral hazard factor by lowering the insurance coverage ratio of the medical costs or setting a certain ceiling on medical expenditures. Second is to shift the frail elderly who are cared for in hospitals covered by health insurance to nursing homes by establishing new social insurance for providing care for the frail elderly. Third is to introduce the scheme of pre-paid or health mainten~ce organization. This is just like a “club” which provides medical services based on the fees of the membership. Compared with the current insurance system in which the compensation for the doctors are linked with the costs of the medical services, the prepaid system reverses the incentives for doctors to use more resources, and instead to reducing the costs. Also, it encourages the health maintenance of the members, contrary to the current health insurance which cover only the costs for treatment of disease. C. Changing Role of a Family If excessive expansion of the gove~ment sector has unfavorable effects on the economy, what are the alternatives? The extent to which government has to increase social transfers to the elderly depends on their family support and their ability to help themselves. In traditional societies such as pre-war Japan, the family was the major entity supporting the need of the elderly. This family function still remains important in today’s Japan, as reflected in the high propo~ion of Japanese elderly being cared for by their children. For example, in Japan 57 percent of elderly males live with their relatives, compared with only 7 percent in the United States (Yashiro, 1993). This is one of the major factors preventing the incidence of poverty among the elderly. However, we cannot expect too much from family altruism in the future. Japanese family structure has been changing rapidly, and elderly people are increasingly less likely to be living with their children than in the past. The changing industrial structure and the associated concentration of the population in urban areas have geographically separated parents from their grown children. In addition, the share of selfemployed families-wherein implicit contracts that children will inherit their parents’ household assets in return for providing care for them are most prominent-has declined,” The share of the extended families in the total has declined from 56 percent in 1977 to 39 percent in 1991, and the declining trend is likely to continue in the coming decades.

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LESSONS TO THE OTHER ASIAN COUNTRIES

Major policy issues facing Japan at the current period have many things in common with other Asian countries. Like Japan, the swift economic growth of many East Asian countries in the last decades has resulted in rapid social changes associated with fertility and longevity, triggering the population aging. Pooling the data of major OECD and Asian countries, these is a positive association between the per capita GDP and the elderly ratio. According to the United Nations Projection, the share of the elderly in Korea and Thai in 2050 will be 3.8 times as high as that in 1995 (Table 2). At the same time, the rapid movement of the workers to the urban area would lessen the traditional role of a family in taking care of the elderly. On the other hand, the social security system in the Asian countries has not developed like those in European countries. The aging in Europe came after their economic development, so that they can afford rich social security programs based on their affluence. Aging in East Asia is so rapid that many countries will have difficulty in catching up to the speed of the aging, even though their economies continue to grow rapidly. While the elderly ratio in major Asian countries will rise to the level of 15 percent between 2030 and 2050, the necessary rates of economic growth to reach the same level as that in the current Japan and major European countries vary by country. Korea and Thai may reach the current level of the four major European countries in around 2030 based on a heroic assumption that the past economic growth will continue in the future. But other Asian countries will face population aging when their economies cannot afford to provide enough resources for the elderly. This indicates that the Western style Welfare State is not feasible for rapidly growing Asian countries, and past experience in Japan implies that it is not desirable either. Once social insurance schemes are established, it is hard to maintain fiscal discipline due to political pressures, and either actual or potential deficits accumulate over time, leaving the increased burden on the later generation. As both family and government alone are not reliable for taking care of the elderly under the rapidly-proceeding aging population, the use of market force would be

TABLE 2.

Elderly ratio and the Per Capita GDP GDP Growth rates

Per capita Elderly GDP

ratiio

Year at

Actual

Necessary

15 %

(1980-93)

(annual rates)

($, 1993)

(%. 1995)

Korea

7,660

5.6

2027

8.2

3.4

Malayasia

3,140

3.9

2047

3.5

3.8

Thai

2,110

6.0

2034

6.4

6.1

850

3.4

2050

0.1

6.0

Philippine Indonesia

740

4.3

2047

4.2

7.0

China Source:

490

6.1

2032

8.2

10.4

Okazaki

(I 996).

Aging ofthe Population

in Japan

259

a realistic solution, supplementing the traditional elderly caring systems. Private-sector initiatives consists of the following: First, the elderly in the aging society are not poor on average compared with the working generation, and they become more economically independent in the economic development. The role of gove~ment is to prevent the various risks facing the elderly in the form of social insurance and welfare services in a uniform way. Private insurance should take care of the services above the minimum level. The health care and other welfare services are to be privatized as much as possible in order to reduce the costs through the market com~tition. Gove~ment should subsidize the poor directly, rather than keep the price of welfare services low for the majority. That the mechanism of income distribution is to be separated from the general provision of welfare services is a key for the efficient allocation of resources. The alternative method of family protection is inevitable in the aging society. Traditionally, the children used to be the monopolistic provider for the elderly care services. But, with changing social norms, it would be better for the elderly to have a competitor in the market for providing the care services for the family. An example is the “reverse mortgage” contract with a financial institution. It is monthly financing to the elderly based on the collateral value of the housing, of which financial transactions are to be cleared at the time of the elderly’s death. If this is combined with pension for lifetime, the elderly’s retire life could be financially supported, partly substituting for the family protection which is based on a similar principle. A good combination between the public insur.. nce assuring the basic needs, and private insurance for satisfying various needs WOI d be desirable.

VII.

CONCLUSIONS

Population aging does not create new problems, but simply aggravates the current dilemma concerning economic efficiency and equity. Japan needs to reform its currently too generous social security system and reduce excessive inter-generational income transfers. There are several options that can be used to alleviate the negative impacts on macroeconomic activities arising from higher tax and social security premiums: modifying public pension system by basing them on an “actuarially fair” principle, broadening the tax base, and reforming the health care system. With the rising life expectancies of the elderly, the “equivalent retirement age” that is necessary to maintain the financial balance of the pension system without disturbing fixed benefits and premiums must also be raised. Raising the statutory age of pension eligibility would reduce the number of beneficiaries while increasing contributors, thereby substantially helping to improve the fiscal balance of the pension fund. Reforming the social security system alone is not sufficient; the tax base must also be broadened in order to maintain the pension system. This can be done by increasing the consumption tax, which is currently 5 percent, and by increasing the capital gain tax. These actions would distribute the tax burden more equally between

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the working generation and the elderly-whose income is mainly based on net wealth and other non-wage income. Also, net increases in social security premiums are required in order for today’s older workers to retire after having paid sufficient costs for their pension benefits. Without such increases in social security premiums, later generations will be left with a large deficit in the pension fund. Rapid population aging is a major challenge to Japan and other Asian economies which have long enjoyed an abundant labor force supply and a low old-age dependency ratio. However, the increased burdens brought on by an aging society may well be overcome by improving resource allocation through structural reforms in the tax and social security systems. Providing better employment opportunities for the elderly will increase the number of social security contributors, while reducing the number of beneficiaries, thus helping to prevent negative impacts on the economy and on society.

REFERENCES Bos, E. et al. 1992. World Population Projections: 1992-93 Edition. The Johns Hopkins University Press. Baltimore. Hatta, T. and Oguchi, N. 1993. The Public Pension Debt of the Japanese Government. Mimeo. Paper presented to the Joint Conference by National Bureau of Economic Research and Japan Center for Economic Research, September 1992, Tokyo. Japan. Hurd, M. and Yashiro, N. ed. 1997. The Economic Effects of Aging in the United States and Japan, The University of Chicago Press. Management and Coordination Agency. 1990. Basis Survey of Peopled Welfure, Government Printing Office, Tokyo Japan. Management and Coordination Agency, 1993, Annual Survey of Labor Force, Government Printing Office, Tokyo, Japan. Ministry of Health and Welfare. Re-estimation ofPension Budget, Government Printing Office, 1994. Noguchi, Y. 1993. After-Retirement Income Maintenance by Home Equity Conversion: Possibility in Japan Mimeo Paper presented to the Joint Conference by National Bureau of Economic Research and Japan Center for Economic Research, September 1992, Tokyo. Japan. Ogura, S. 1993. Projection of Japanese Public pension Costs in the First half of the 2 1st Century and the Effect of Three Possible Reforms, Mimeo. Paper presented to the Joint Conference by National Bureau of Economic Research and Japan Center for Economic Research, September 1992, Tokyo. Japan. Schieber, G.S. and Poullier, J.P. 1989. “Overview of International Comparisons of Health Care Expenditures,” Health Care Financing Review 1989, Annual Supplement l-7. Seike, A. 1989. “The Effect of the Employee pension on the Labor Supply of the Japanese Elderly,” A Rand Note N2862. Takayama, N. 1992. The Graying of Japan: An Economic Perspective on Public Pensions. Kinokuniya and Oxford University Press, Tokyo, Japan. OECD, The Role of the Public Sector, 1985, Paris, France, OECD. OECD, The Economic Survey of Japan (1989/90), 1990, Paris France, OECD. Yashiro, N. 1993. Economic Position of the Elderly in Japan with Specific Reference to the Sample Selection Bias. in Mimeo. Paper presented to the Joint Conference by National Bureau of Economic Research and Japan Center for Economic Research, September 1992, Tokyo. Japan. Yashiro, N. and Oishi, A. 1993. Population Aging and the Saving and Investment Balance in Japan, Mimeo. Paper presented to the Joint Conference by National Bureau of Economic Research and Japan Center for Economic Research, September 1992, Tokyo. Japan.

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Yashiro N. and Maeda, M. 1994. “The Applicability of Life Cycle Hypothesis to Japan (in Japanese),” Nihonkeizaikenkyuu No. 27. Yashiro, N., 1996. The Fiscal Imperatives of Changing Demographics in Japan, in The New Fiscal Order: Implicationsfor Industrial Nations, edited by E. Steverle and M. Kawai, The Urban Institute. Yoshitomi, M. and Yashiro, N. 1992. “Long-term Economic Issues in Japan and the Asia-Pacific Region,” in Long-term Prospects for the World Economy, Paris, France, OECD.

NOTES 1. The fertility ratio here is defined as the average number of children born to a woman during her lifetime. Recent corresponding fertility ratios in the OECD countries are 2.0 for the United States, 1.8 for France and Canada, and 1.5 for Germany (OECD 1990). The ration is particularly low in Japan’s urban areas, for example, in Tokyo Preferture, it is 1.1 in 1993. 2. This refers to the average life expectancy at birth. Recent corresponding ratios for males (females) in other OECD countries are 72.2 (79.1) in the United States in 1991,72.8 (80.9) in France in 1990, 72.6 (79.0) in Germany from 1988 to 1990 (OECD 1990). 3. These figures include self-employed older workers, many of whom are in the agricultural sector. As the average ratio of labor force participation of self-employed is higher, and their share in total labor is now shrinking in size, there has been a downward bias on the average participation ratio. Because of this, the ratio of employees (rather than total workers) to the population is a better indicator for the labor force behavior of older workers. Between 1987 and 1993, the comparable ratios of male employees (i.e. excluding the self-employed) age 60 to 64 to the population went from 38 percent to 46.5 percent, and the same ratio for male workers age 65 and above went from 13.3 percent to 17 percent (Management and Coordination Agency 1994). 4. Through the 1980s those countries with relatively higher labor force growth such as the United States and Australia had low rate of total factor productivity (TFP) growth, while major European countries with relatively low rates of labor force growth had high TFP growth (Yashiro and Oishi 1993). 5. The logic behind the projected decline in the external surplus is that household savings are more dependent on the life cycle patterns of household members, while business investment is primary affected by changes in the labor force growth as well as its quality improvement, which can be enhanced with technology. 6. For example, an average public pension benefit for a couple in Japan was 15 1,000 yen per month in 1992 (about 1192 US dollars), which is roughly 20 percent lower than a similar pension in Sweden. In contrast, the full pension granted to Japanese who have contributed into the fund for 35 years would be 43 percent larger, a figure well exceeding the current pension level in Sweden. 7. The majority of OECD countries, except France, Italy, and New Zealand, set the eligibility age for males and females at 65 years and 60 years or above, respectively (OECD 1988). Also, in Japan, public pension for the self-employed set it at 65 years. 8. The public pension premium is shared equally between the employer and employees in Japan. 9. These figures increase every five year with average earnings in the economy. The full pension benefit beyond the age 65 is not subject to any earning tests. 10. Recently, nominal user charges of 1000 yen (roughly US $10.00) per month and 700 yen (($7.00) per day for hospitalization were introduced. 11. The proportion of drug costs relative to total medical expenditures was 18 percent in 1986, compared with 7 percent in the United States (Schieber and Poullier (1989)). 12. “Three generation families” in which parents, children, and grandchildren live together and share the family budget accounted for nearly 50 percent of agricultural households in 1990. The equivalent ratios for non-agricultural self-employed households and employee households were 16 percent and 11 percent, respectively (Management and Coordination Agency 1990).