DemographicChallengesandJapan’s FiscalPolicy

Demographic Challenges and Japan’sFiscal Policy

Hiroyuki MatsuokaPolicy Research Institute, Ministry of Finance, Japan

The Tokyo Fiscal Forum, June 5-6, 2017Session 3

Presentation Outline

Ⅰ． Demographic trends in Japan

Ⅱ． Social security benefits spending and central-government finance

Ⅲ． Unexpected demographic change and its impact

Ⅳ． Lessons

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Ⅰ．Demographic trends in Japan

3(Note) 1945’s population pyramid based on East Asian age reckoning. Average age of 1945 is an estimated value. “Aging rate” is referring to age 65 and older ratio to the

total population.(Sources) Ministry of Internal Affairs and Communications ″Population Projection”, National Institute of Population and Social Security Research,

“Japan’s Demographic Composition in the Future” (estimation as of January 2014), UN “World Population Prospects 2015 revision”

age

65

20

(ten thousand )

The first baby boomersAge:96~98

The second baby boomersAge:71~74

Men Women

1945After the WWⅡ

1973The first year of high-level

social welfare

2015Recent

2045Near future

28 years 42 years 30 years

0 50 100 0501000

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60

70

80

90

100

0 50 1000501000

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70

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0501000

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80

0 50 100 0501000

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0 50 100



The second baby boomersAge:41~44

Demographic Change in Japan The population composition of 1945 in Japan was similar to the current Myanmar. The level of aging now is, and projected to be, unprecedented.

Men Women Men Women Men Women

Year 1945 1975 2015 2045Average age 27.3 32.5 46.5 52.8

Aging rate 5.1% 7.5% 26.8% 37.7%A similar country to Japan at that time Myanmar Brazil －－

Ⅱ． Social security benefits spending and central-government finance

Social Security Benefits and the Sources of Funding in Japan

4(Sources) National Institute of Population and Social Security Research

“The cost of Social Security Benefits”, FY2015: Ministry of Health, Labor and Welfare (initial budget)

Social Security Benefitsin FY2016

Sources of Fundingin FY2016

(Note) USD billion. 1USD=112JPY(2017/3). Total amounts of social security benefits are 1056.3 USD billion.

Debt Service, 24.4%

Social Security, 33.1%

Local Allocation Tax Grants, etc,

15.8%

Public Works, 6.2%

Education and

Science, 5.5%

National Defense,

5.2% Others, 9.8%

Government Bond Issues,

35.6%

Tax and Stamp

Revenues, 59.6%

Other Revenues,

4.8%

＜Ref: General Account Budget for FY 2016＞

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Expenditure

Revenue

Long-term Care, Welfare, etc 211.6

Medical Care338.4

Pension506.3

Asset Income, etc59.8

Local Governments117.0

Central Government287.5

Contributions592.0

(Note) Total expenditure and revenue ofFY2016 was 825 billion USD

(%) (%)

Ⅲ．Unexpected demographic change and its impact

In 1956, 32% of the population had no health insurance. Only employees of large companies enjoyed the health insurance system. In 1960, more than half of the reasons of welfare payment were the family sickness.

There was no pension fund for farmers, SME employees, and independent proprietors, while there were for large company employees and public servants.

Amendment of National Health Law（1958）: enacted from 1961 The Municipalities operate the insurance. The participation was compulsory but for insuree of

employee insurance.

Establishment of National Pension Act (1959): enacted from 1961. The contributors are Japanese nationals from age 20 to 59. 25 years of contribution were

required to be eligible. Benefits were received from age 65 and above.

Introduction of universal health care and national pension system in Japan (1961)

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(Source) Annual Health, Labour and Welfare Report

0

5

10

15

20

25

30Establish of public long-term

care insurance system (2000)

(Notes) These charts are made by PRI (Policy Research Institute). Original data sources are ″Population Projection”, “National Census” (Ministry of Internal Affairs and Communications), and “Labour Force Survey”, “Abridged Life Table”, ‘‘Vital Statistics’’ (Ministry of Health, Labour and Welfare)

Establish of universal health insurance and

universal pension coverage (1961)

First year of high-level social welfare (1973)

Establish of health services scheme for the aged (1983)

Establish of latter-stage elderly healthcare system （2008）

(FY)

(%)

Year 1960 1970 1983 1990 2000 2010 2015

Topics, etc.

Establish of universal health insurance and

universal pension coverage

First year of high-level social

welfare

Establish of health services scheme for the

aged

The bubble economy period

Establish of public long-term care insurance

system

Establish of latter-stage elderly

healthcare systemRecent

Life expectancy (Men) 65.3 69.3 73.4 75.9 77.7 79.6 80.8

Life expectancy (Women) 70.2 74.7 78.8 81.9 84.6 86.3 87.1

Aging rate 5.7 7.1 9.1 12.1 17.4 23.0 26.7Total fertility rate 2.0 2.13 1.75 1.54 1.36 1.39 1.46

Aging Rate

Social Security Benefits to GDP ratio

[Ref] Demographic Change and Increase in Social Security Benefits in Japan

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With the rapid progress of aging population, social security benefits have been increasing.

Social Security Benefits to GDP Ratio

11.21.41.61.8

22.22.4

69 74 79 84 89 94 99 4 9 14

9

Transition of the total fertility rate

(Sources) National Institute of Population and Social Security Research “PopulationProjections for Japan 2011-2060”, Institute of Population Problems “Future Population Estimates for Japan –by Sex and Age, 1970～2050-”Ministry of Internal Affairs and Communications “Population Projection”

Projections(as of 1969) Projections(as of 1986)

“A social security system should be designed based on the long-term projections.”（Fiscal System Council（Nov. 28, 1968））

However , there were great differences between actual results and projections.

Socio-Economic Projections and Actual Results in Japan

Transition of the aging rate＜Projections (as of 1969)＞＜Actual value＞

Since 1973 1973～19886.2％ 6.9％ (average)

＜Projections (as of 1990)＞Since 1990 1990～2014

5.5％ 3.7％ (average)

(Sources) Ministry of Health, Labour and Welfare “Future Population Estimates for Japan by Sex and Age, Estimated in August 1969”,‘‘Vital Statistics’’, Institute of Population Problems “Population Projections for Japan: 1985-2085”

(Sources) Ministry of Health, Labour and Welfare ‘‘actuarial review’’

(%)

Investment yield of public pension

(FY)

0

10

20

30

40

50

1970 80 90 2000 10 20 30 40 50

Actual value

Projections(as of 2012)

Projections(as of 1975)

(%)

(FY)

Actual value

‐9.8

‐12.00

‐10.00

‐8.00

‐6.00

‐4.00

‐2.00

0.00

2.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

（% to GDP）

13,000

17,000

21,000

25,000

29,000

33,000

1989 1992 1995 1998 2001 2004 2007 2010 2013 The aged people: 65+ (actual) The aged people: 65+ (projection)

（Thousand people）

Effect of projection Error on Pension Reserve Funds in Japan

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The Japanese pension system have Public Pension Reserve Funds, which is expected to play a key role as buffer when long- or short-term fiscal risks hit theeconomy.

The gap between the PRI’s estimation based on 1986 population projections and actual value could be as much as 9.8% to GDP in 2013.

Figure 1 Trends in the population from 15 to 64 years old in Japan

Figure 3 Gap between estimation and actual value in Public Pension Reserve Funds

Figure 2 Trends in the population over 65 years old in Japan

(Source) PRI‘s calculations. Data from Institute of Population Problems “PopulationProjections for Japan: 1985-2085” and from the Ministry of Health, Labourand Welfare “Japanese Social Security Statistics DB“ and “Annual report ofGovernment Pension Investment Fund“.

(Source) Ministry of Health, Labour and Welfare “Vital Statistics”, Institute of Population Problems “Population Projections for Japan: 1985-2085”.

(Note) The estimation means the difference between the actual Public PensionReserve Funds and the calculated value under the assumption that 1986population projections have been realized.

(Source) Ministry of Health, Labour and Welfare “Vital Statistics”, Institute of Population Problems “Population Projections for Japan: 1985-2085”.

73,000

77,000

81,000

85,000

89,000

93,000

1989 1992 1995 1998 2001 2004 2007 2010 2013 The aged people: 15 to 64 (actual) The aged people: 15 to 64 (projection)

（Thousand people）

(decomposition)

△ Revenue from Investment

△ The Public Pension Reserve Funds

△ Revenue from Subsidy

△ Revenue from Premium△ Total Expenditure

Hypothetical Projection Error of Health-Care Expenditures in Japan

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The long-term projection of health-care expenditure could have been underestimated considerably.

Per-capita health care expenditure of both the aged and others has grown much faster than the economic growth.

PRI's hypothetical projection of the health-care expenditure from 1989 shows that the actual health-care expenditure could be higher than its projection by as much as 2% (to GDP ratio) in 2013.

Health-Care Expenditure Per-capita health care expenditure

(Notes) 1.The per-capita health care expenditure is forecast according to actual per-capita GDP growth. The projection gap in the health care expenditure reflects the projection error not only in the

per-capita expenditure but also in demographic changes.2. The definition of the aged people is based on “health care system for the aged (Roujin-hoken seido)” until 2007 and “long-life medical care system (kouki-koureisha-iryo seido)”

thereafter. The former system basically covers people at 70 or above, which is gradually narrowed to 75 or above from 2002 to 2007, while the latter system basically covers people at 75 or above. The projection for the aged people also reflects the change in the age classification. The health-care expenditure for the others covers all the expenditures excluding the expenditure for the aged.

(10 thousands yen)(% to GDP)

The aged people: 70+

The aged people:75+

70+ to 75+

(FY) (FY)

Per capita healthcare growth proportional to per capita GDP since 1989

Ⅳ．LESSONSIt is important to minimize uncertainties. What should we keep in mind in designing or revising social welfare system?When making projection: Consider if it is too

optimistic.

What it comes to politics: Remember “uncertainties” especially under good economic condition.

When designing Public Pension System: Choose an option of lesser fiscal impact.

When tackling Medical Care Cost : Envisage the advance in medical technology would push it up.

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Thank you very much!

DemographicChallengesandJapan’s FiscalPolicy

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