Japan's population is considered to be the fastest aging in the world. As of 2011, people aged 65 or older accounted for 23.3% of Japan's population, and this figure is estimated to reach 33.4% in 2035, according to the National Institute of Population and Social Security Research.
Some point out the importance of encouraging elderly people to continue to work as the declining working population due to the low birthrate is causing labor shortages. That may sound logical, but in economics terms, the argument is intriguing. That's because when an economy experiences a labor shortage, wages will rise, leading the elderly to defer retirement. So why does the government need to encourage elderly people to keep working?
If all elderly people had saved money spontaneously and freely retire when they feel that they have saved enough, the government may not need to encourage them to work.
However, Japan's pay-as-you-go pension system pays out pensions using contributions from today's working population. When they start to receive payments, elderly people, feeling their livelihoods are stable, tend to retire. Thus, when a government operates a pension system, it exerts great influence on retirement ages by changing the pension eligibility age.
Currently in Japan, while the contributing population is decreasing due to the aging population, the population receiving pensions is increasing. This is why policy measures are needed to balance the contributing population and the receiving population by raising the pension eligibility age. But raising the pension eligibility age alone does not boost employment of the elderly. It is also necessary to address the barriers that elderly people face when they try to continue working.
The barrier is the compulsory retirement system. Japanese companies, especially large ones, have traditionally been motivating their employees by offering deferred compensation exceeding the value of their productivity level during the stage when they become middle-aged and older. A compulsory retirement age is set to end clearly the period of excessively high wages.
* Translated by RIETI from the original Japanese "Yasashii Keizaigaku" column in the October 28, 2013 issue of Nihon Keizai Shimbun.
