Aging Japan and the National Burden Rate

This paper examines an optimal rate for the national burden to establish guidelines for fiscal reform in Japan's graying society. The paper looks at the Japanese tax and social security systems through an extended life-cycle general equilibrium simulation model. It explicitly considers the benefits that the government provides to households, and this enables us to comprehensively evaluate the balance between benefits and burdens. In doing so, it is crucial to determine to what degree households put a utility weight on the benefits coming from government expenditure, compared with their private consumption. Therefore, in this paper the weight parameter is estimated based on a RIETI questionnaire survey on the optimal burden in Japan. Simulation results show that an optimal rate for the national burden would rise as Japan ages, and may exceed 50% during a period of rapid aging of its population. The results also suggest that, with regard to the total amount of the social insurance benefit or that of the national burden, in the long run substantial differences will develop between cases where the income replacement ratio in the public pension program is maintained at the present level and where the contribution rate is capped in accordance with the government's current pension schedule.