"New" Economics of Aging Needed Now

Faculty Fellow, RIETI

Why "new" economics of aging?

The pace of population aging in Japan is far faster than in other developed countries. As of 2005, one of every five people in Japan was aged 65 or older. In the meantime, we have been witnessing fertility falling to an extremely low level. The ongoing demographic changes - population aging combined with the continuous decline in fertility - are posing an unprecedented challenge to the Japanese economy. Other countries undergoing population aging are keenly watching how we cope with this daunting challenge.

Not a day passes without a report in the media about the problem of population aging and declining fertility. A consistent tone prevails in these articles. An increase in the number of elderly who are "supported" by the social security system leads to an inevitable increase in social security expenditures such as pension payments and medical and nursing care expenses. On the other hand, the number of young people who "support" the social security system is unlikely to increase. At the moment, it seems that no definitive fertility-boosting measure is in the pipeline. If left unattended, this will increase the social security burden per active person to an insupportable level, thus undermining Japan's economic vitality and ultimately destroying the social security system. Something must be done now. Indeed in the past two years major, successive reforms have been implemented in the pension, medical care, and nursing care systems.

Japan's debate about population aging and declining fertility is largely divided into two types. One is what I call a "traditional approach" in which each of the three areas - pensions, medical care, and nursing care - is discussed separately. The other type focuses on the financing aspect of the problem, that is, to what extent overall social security expenditures and the resulting burden on the younger generation will increase as a result of further aging of the Japanese population. It is fair to say that these arguments, which I call an "institutional and macroscopic approach," have been dominating Japanese debate on the social security system. However, the most important viewpoint seems to have been missing in all the arguments to date.

Microdata is essential to analysis from the viewpoint of the elderly

In RIETI's project, "Toward a Comprehensive Resolution of Social Security Problems: A New Economics of Ageing," (hereinafter referred to as the "New Economics of Ageing project") launched last year, we propose a new approach that is both comprehensive and microscopic. The basic idea underlying this approach is quite simple: whether or not a social security policy is useful should be assessed from the beneficiaries' point of view. Particularly, in order to improve systems such as those for pensions, medical care, and nursing care, it is important to clarify to what extent these systems contribute to improved living standards of the elderly by evaluating them in terms of aggregate scores.

This sort of idea is certainly quite natural and nothing new internationally. In Japan, however, sufficient study in this direction has not been conducted due partly to the lack of data. Given the rapid pace of population aging, a fundamental change in thinking is imperative. For that, we should look at elderly people as a beneficiary of the overall social security system, not as a beneficiary of each separate program (a beneficiary of the pension system cum beneficiary of medical care system cum beneficiary of the nursing care system). Another basic stance taken in the New Economics of Ageing project is that discussions about population aging should incorporate various aspects of the elderly such as their health condition, employment status, financial status, family ties, and links with friends and communities. The social security system is closely interrelated with and thus inseparable from all these factors.

However, it is no easy task to capture the overall picture of elderly people's living standards; the situation for those in their late 60s is totally different than for those in their 80s. Likewise, the situation for those who are wealthy, in good health, have good family relationships, and are actively associated with society must be completely different than for those with scarce assets, prone to illness, with no relatives, and reclusive. No effective policy can be generated from discussions that treat the different subgroups of the elderly as one and the same.

So then how can we reflect such diverse circumstances of the elderly in social security policies? The only possible way to take in the voices of individual elderly people and link the reality of their life to social security policies is to collect an enormous amount of data that contains a wealth of information. A series of large-scale panel surveys of middle-aged and older people is being undertaken in various parts of the world to ostensibly establish a "world standard," as represented by the Health and Retirement Study (HRS) in the United States, the English Longitudinal Study of Ageing (ELSA) in Britain, and the Survey of Health, Ageing and Retirement in Europe (SHARE) in the Continental Europe. And these moves are starting to proliferate among Asian countries such as South Korea and Thailand.

Each of these surveys has hundreds of extremely diverse questions. The accumulation of such data will make it possible to identify, for instance, how elderly people would react to certain policy changes and what sort of incentives would be effective in eliminating wasteful expenditures.

Social security policies based on empirical analysis

In the last fiscal year, in preparation for a full-scale panel survey of middle-aged and older people comparable to the world standard, we conducted two pilot studies under the New Economics of Ageing project. We have been keeping close contact with and receiving enthusiastic support from the leaders of HRS/ELSA/SHARE. In a workshop held this year on August 4-5, we had extremely substantive and pragmatic discussions on topics such as questionnaire contents, survey methods, and survey response rates. This workshop was realized primarily with the support of the National Institute on Aging (NIA) and attendants included HRS and SHARE leaders, indicating the degree of interest in Japan's population aging problem.

A panel survey of middle-aged and older people of a world standard level can be realized only by having all the following conditions met: ample funds, sufficient understanding among relevant government and other public agencies, and vigorous input from leading researchers. When asked to what extent the HRS has been contributing to the formulation of social security policies in the U.S., a director of the NIA said, "entirely." Whenever considering a new policy, the White House checks with the HRS as to whether there is scientific evidence that supports the policy, he explained.

Unquestionably, only when such a large-scale panel survey is undertaken in Japan will it become possible for the government to formulate effective social security policies firmly based on empirical analysis. Breaking down the walls of institutional or financial arguments, we must reconsider social security policy from the viewpoint of the elderly. By doing so, we will be able to generate new knowledge and ideas usable not only in Japan but also abroad. As RIETI President and CRO Masaru Yoshitomi put it, it would be "disgraceful" if Japan continues to basically be the only developed country without a world-standard panel survey of the elderly amid the rapid aging of its population. I do hope that this project will gain understanding and support from as many people as possible.

September 19, 2006

This column is based on the findings from the study, "Kurashi to kenko no chosa - yoriyoi iryo, kaigo, nenkin seisaku ni mukete" [Study on elderly people's lives and health - toward more effective social security policy], a pilot study of the Japanese version of HRS/ELSA/SHARE, complied as part of the RIETI's project results in the last fiscal year. Part of the findings from this study have been excerpted and rewritten for the purpose of this column.

September 19, 2006