Economic Effects of Financing Public Pension Plans from Tax Revenue

This paper summarizes the literature on financing Japanese public pension plans from tax revenue and simulates the economic effects of financing from tax revenue in the short and long terms. From our analysis for the short term, we have found that financing the basic pension from consumption tax will likely lower the household welfare level compared with financing from social insurance premiums. This is because the excess burdens generated by social insurance premiums, which are imposed on labor, are lighter than excess burdens from consumption tax if the supply of labor is mostly fixed. In the long term, financing public pension plans from consumption tax will help achieve higher economic growth rates than financing from social insurance premiums, which are imposed on income, but will curb consumption by those generations still working and will lower the welfare level. Japan should also avoid depending solely on consumption tax for financing public pension plans from tax revenue because of the regressive nature of the tax.