Challenge of Aging: Japan and the Netherlands

Date October 18, 2005
Speaker Hans VIJLBRIEF(Director-General Economic Policy, the Ministry of Economic Affairs in the Netherlands)
Moderator TANABE Yasuo(Vice-President, RIETI)


This lecture will cover the challenges to the aging society and policy responses. Aging seems to be a significant problem for Japan, but it is less of a problem than some people here may think. Compared to the Netherlands, people in Japan are quite prepared for aging. On the other hand, in a certain sense, one might argue that it is not a problem at all. Why would it be a problem if the population becomes older or smaller, especially with dense urban populations? I am going to talk about how aging differs in Japan from the Netherlands. Issues I will touch upon include policies on fertility, migration, labor participation and productivity, and the budget.

Let us think about what "aging" means. Economists understand aging as an increase in dependency rates, meaning that the ratio of people above the age of 65 is increasing and the number under 65 is decreasing. There is less GDP growth as a result of the decrease in the growth of the labor force. There are also fiscal sustainability issues. Elderly care and healthcare pensions are taken care of by the government; therefore there is a fiscal sustainability issue. So, I am going to talk about these three things: increasing dependency rates, lower GDP growth, and fiscal sustainability.

First let me show you a slide about population which tries to compare Japan and the Netherlands in terms of demographic change. The population now in the Netherlands is about 16 million people and the growth rate is decreasing. Japan's case is totally different from a demographic standpoint. In Japan, there really is a shrinking population. The main reason for this difference between the populations of the Netherlands and Japan is the fertility rate. The fertility rate in both countries is low, but Japan's is extremely low. The aging problem in the Netherlands is a problem of the baby boom generation. After the Second World War, people had many children, and now that generation represents the older population. Growth of the population is now going down, and consequently the population is flattening. In Japan the low fertility rate is bringing the population down.

As for dependency rates, Japan shows the highest increases, the amount of elderly people who need to be taken care of, and the rate of people above 65 put against the number of people between about 30 and 65. The EU-15, along with the Netherlands and the United States, has a much slower rise in dependency rates. My argument here is that for Japan, dependency rates are not exactly relevant because there are many people working at age 65. With the Netherlands, the number of people working at this age is almost zero. Therefore, the dependency rates are a bit more relevant for European countries than they are for Japan. The main thing to keep in mind, however, is that Japan has a problem with fiscal sustainability, and the increasing of government expenditures in a shrinking economic base.

Moving on to economics, it is clear that there is aging going on all over the world. Let's look at three countries, Japan, the United States and the Netherlands, as representatives of their respective geographic regions. It is clear that the average economic growth in Japan from 1970-2000 was more than 3%. But in the upcoming decades, economic growth will recede to only 1%. In the European Union as well, there will be lower economic growth. When compared to the other regions, U.S. economic growth remains the highest. Although there are other effects in force here, such as productivity, ultimately economic growth will decline in all regions of the world in the upcoming decades because of aging. In particular, Japan's economic growth is decreasing the fastest.

Economic growth is 1% for Japan, 1.7% for the Netherlands, and 2.3% for the United States. Typically speaking, economic growth in the upcoming decades will be at approximately 1.7% or 1.8%. This is just an assumption, but you can see the significant difference between the two extremes here. Japan is one extreme where the population growth is negative, and the other extreme is in the United States where population growth is positive.

In Japan, economic growth is going down as a result of aging because the growth of your labor force is also declining. Furthermore, your labor force is getting older. Usually older people have a lower rate of participation in the workforce. Those are the two impacts of aging and growth: slower growth, and an aging labor force.

Welfare in my slide here is not measured by economic growth, but by GDP per capita growth. Basically, GDP per capita growth has more or less the same projection for the upcoming decades in all three regions: Japan is 1.5%, the Netherlands is 1.5%, and the United States is 1.8%. Therefore, welfare growth in the three regions is about the same. For very densely populated countries like the Netherlands and Japan, it is not a problem as such that the population is not growing as much.

Keep in mind that aging and the slowing of economic growth is not necessarily a problem. One should look at GDP per capita growth to get a better assessment of what these other changes imply. The GDP per capita growth is a bit higher in the United States still, but in Japan and the Netherlands it is about the same. The downside of this story of course is that the EU has a problem with how to finance the elderly. An economic base is necessary, and when economic growth goes down the base shrinks or does not grow as much, and taxes pay for these elderly.

This point brings me to the issue of the budget. The yellow bars in my slide represent governments' age-related spending in the upcoming decades. This shows that Japan's age-related spending will increase by about 3%. This means that in 2050, 3% of its GDP will have to be used for the extra financing of pension and healthcare. Going back to the Netherlands, age-related spending will go up by 10%, from 18% to about 28%. How can Japan, with the largest aging problem from a demographic perspective, have such a smaller problem in terms of its budgetary consequences? The reason is actually quite simple.

Japan has two main advantages. First, the Japanese work more than the Dutch. So an aging population for Japan is much less severe than for the Netherlands. Second, the replacement rates (the ratio of your pension to average wages) are about 10% lower than in the Netherlands. This means that elderly Japanese are not only working much more than elderly Dutch, but that there are also lower pensions in Japan. Therefore less money is needed to finance pensions in Japan than in the Netherlands. That is why there is a big difference between Japan and the Netherlands in terms of budgetary consequences, although demographically, the state of aging in Japan seems to be much worse.

Moving onto the summary challenge for 2000-2050, the population of Japan in the next 50 years will decrease by 20%. Currently the population is still going up by 10%, but the labor force will soon be one-third lower than what it used to be. The population in Japan is slowing down and shrinking, as shown from the shift from 28% to 72% in the dependency rate, meaning that for almost every elderly person there will be one person working. In the Netherlands, dependency rates will only go up from 22% to 43%.

Policy options for aging populations include increasing fertility, fostering immigration, increasing the participation in the workforce, fostering productivity, and working on the budget. Starting with fertility, one important point on this kind of policy is that some European countries are trying to increase fertility by way of government policy. This is not an easy policy to introduce. The second point to remember about fertility policies is that if fertility increases, in the first 20 years, the government later has to pay for those extra people who will need an education to enter into the workforce.

Immigration is a different policy and is also difficult to administer as well as to explain. Importing young migrants into a country is not really solving the issue of aging. It is important to understand demographically that those migrants will also become old. The first problem with migration policies is that a country needs space. Secondly, there is no guarantee that immigrants will necessarily work.

In terms of labor participation, Japan has a high participation rate in the labor market. In Japan, there is also a very high effective retirement age. The Netherlands has a medium participation rate in the labor market, but a very low effective retirement age. In the Netherlands, the age is 62 for men. In Japan, the age for men is 70 and for women it is 66. Based on participation rates for age and gender, among 25-49 year-old males in both the Netherlands and Japan the amount of work is more or less the same. Females 25-40 in Japan, however, work less than those the Netherlands. However, these same women in Japan work more than those in the Netherlands between the ages of 50-64. One of the big issues for the Netherlands is how to increase the number of working hours for women between the ages of 25-49. The age group of 65-74 shows a substantial difference between the Netherlands and Japan. Those working in Japan above 65 have a double-edged sword to cope with aging because they are receiving less pension while actually contributing to the pension funds.

Productivity issues are being discussed in terms of the welfare gap, the gap in GDP per capita. The Netherlands has a welfare gap of about 23% but our working hours are far less than the United States due to U.S. institutions which foster working hours, such as childcare and low marginal tax rates. The Netherlands has a high marginal tax rate.

In Japan, you have a very high participation rate like the Netherlands but no issue regarding working hours; however, productivity is a problem. So the aging problem in Japan should be solved by productivity growth and by advancing policy options, such as regulatory reform. Something should also be done to increase competition in the network industries. In addition, Japan should open its market more to trade with the Organization for Economic Co-operation and Development (OECD) and to foreign direct investment (FDI), especially in the service sector. The budgetary situation in Japan is worrisome. With a deficit of 6.5% and a government debt of about 160%, the budget is unsustainable. Aging will eventually place an even heavier strain on the budget.

To conclude, demographically there is a bit of an aging problem in Japan. There is a much better functioning labor market for elderly people in Japan than in the Netherlands. Japan's policy in terms of working hours is also good compared to that of the Netherlands. Productivity, however, should be improved in Japan. Regarding the budget, this is a problem of more concern for Japan than it is for the Netherlands.

Questions and Answers

Q: The most important point with Japan is how to increase women's labor force participation. As you mentioned, there is an "m"-shaped labor force participation. Your country is quite advanced in utilizing the female labor force. We are now working hard to learn from your experience, and to adapt your system to the Japanese labor market. So would you care to elaborate more on that point: how to utilize the women's labor force?

A: Many women in the labor market working part-time are protected by labor rights. They have the same pay per hour, same kind of holidays, etc., as full-time workers. So there does not seem to be the same kind of duality that you have in Japan with a flexible labor market which is not well-protected at all. The situation in the Netherlands is that this other part of the labor market, the temporary or flexible labor and part-time work, is very well-protected.

Dutch women often start out working full-time, and after they have children they go down to working two or even one day a week. Once their children go to secondary school they go back to working four days a week. The problem is that if we want to increase our economic base then we would like to have those women with younger children also participate more. A huge problem with our childcare system is that it is too expensive and it is not working well enough because of marginal tax rate problems. The average marginal tax rate is 40%, so if you are a woman and your husband is working and you are going to work, we have made some astonishing calculations: if the women who works two to three days a week worked an extra day, she would end up holding onto 10-20% of her pay. This means that her marginal tax rate, which is taxes and childcare, takes 80% of her pay. So instead of working, Dutch women just choose to stay at home after they have children.

Q: I hope you can talk a little bit more about prospects for increasing the birthrate, because you seem to dismiss that as almost being impossible. However, I am under the impression that in France they have had a certain amount of success in changing this around. Also in Japan, if you talk to women about the problems of working and having children, there are very specific issues. For example, it is hard to find a daycare center. I was thinking about the possibility of solving these very specific issues and making it much cheaper and much less inconvenient to raise children. Do you think there could be some success with this?

A: What I meant by not being very strongly suggestive about fertility is that I have a problem with the policies. In the Netherlands, people are actually subsidized for the number of children they have. That does not seem to work very well. That is the French policy as well, I believe. I do not like it for a lot of reasons and I do not think it is very effective.

The fertility rate is not being kept down by a lack of childcare in the Netherlands. The childcare issue comes out of the amount of hours that women work. So they do have children, but they are made to work less to watch their children. I think that the issue in Japan does not have so much to do with fertility.

Q: What kind of policies do you think would be appropriate for keeping people in the workforce longer? For example in Japan, there is no problem with getting more people into the service sector. Older faces are no problem but, for example, in Germany you will not get employed even if you want to work longer.

A: There are many reasons why people in European countries retire early. First and foremost, there is a lack of incentive. Second is that demotion policies that place aging workers jobs with less stress or demands, are quite unusual in the Netherlands. Third, there is a lot of age discrimination. That is the culture in the Netherlands perhaps, but I am a firm believer that these things are less culturally induced and more policy induced than we think.

Q: We have learned a lot from the Dutch model on work-sharing in the sense that our population is aging, and we need to learn more about your country. What is your evaluation of the current part-time and full-time labor situation and how work is shared by these groups in Dutch society?

A: What you should keep in mind is that part-time employment is different from temporary employment. Basically, many part-time workers get regular contracts. So a lot of women have regular jobs, but work three days a week. That is different from people who are temporarily employed and on flexible contracts. Two things for shared labor could be done for Japan. One is that you should deregulate your fixed contracts so that employment protection legislation is deregulated. You should make rights the same for part-time and full-time workers. And, be very careful that the government does not encourage dual labor markets with people always in the flexible part of the market; so you should take care of the people. That is what is happening in the Netherlands. A lot of young people in the Netherlands start at a flexible job, and then go on to a normal job. It would be bad to have a real dual labor market with a flexible part that is lowly-educated and consists of migrants and women.

Q: What are the strengths and weaknesses of the Dutch-type market?

A: The strength of the market is that it ensures equal working conditions for part-time or full-time workers. The weakness of the market is the strict regulations on regular contracts.

Q: Is the Netherlands trying to reform that weakness in the system at this moment?

A: Yes, if you look at the work dismissals, we are trying to change the system. For example, if there are dismissals in the company, there is a loss of the youngest employees. They are the first ones to be let go during restructuring. That is a huge attack on the flexibility of the companies because it is not good for them to fire all of their young workers. So one way to change this system would be to allow more freedom for the employers to choose who they fire. That is of course being resisted by unions because they are there to protect those who are employed.

Q: So your program deals with the labor cost issue from the standpoint of employers?

A: It is not so much labor cost. It is more decreasing firing costs. If dual labor markets are not desirable, then the normal labor market should be more flexible. That is the answer to this duality. That is the lesson from Europe.

Q: You have talked about the budgetary issues and nowadays in Japan there is a big political debate going on. Prime Minister Junichiro Koizumi is pushing for a "smaller" government. "Smaller" or "bigger" is the issue. What is the status on this debate in the Netherlands? First, what is the reality in the Netherlands right now, and what debate is going on concerning this issue?

A: I think that what Japanese mean by a "smaller" government is a government with less property and less debt. If, however you mean by "smaller" government a decreasing in your expenditures and tax rates, I am not so sure what should be done for Japan. I suppose your government is too "big" in the sense that the government has a lot of property it should not have, and this has to do with the market economy. So I would say that this goes for the Dutch situation as well. Dutch policies have been trying to bring down the government for about 20 years now. Not "bring down" in the sense of selling holdings, but more in the sense of bringing down expenditures and taxes.

We used to have an expenditure rate of about 60% of the GDP 20 years ago, which is more or less the rate you would expect for a socialist country, but not for a market economy. We are now at 45%, so our government expenditures have been brought down, and you see that in other European and Scandinavian countries as well. I would not be sure, however, that with your kind of government expenditure that your government is too "big" in the sense that your taxes are too high.

Q: Are there any tax issues that are being debated in the Netherlands like income tax, corporate tax, or value-added tax (VAT)?

A: The issue is the debate around tax deductions versus marginal rates. We have big deductions from pensions and housing. Many people are arguing that it might be better to strip away these deductions and lower marginal tax rates.

Q: In Japan, the government intervenes in every part of the market economy, and that is why we call it a "big" government. Even if the number of public employees is relatively small, there are many semi-public officials in Japan. So that is one of the purposes of Prime Minister Koizumi's reform: to get rid of those semi-officials and to change them into more pure and private sector employees. That is related to the setting of public businesses.

A: I think there is something in public businesses where the government tries to loosen its grip on all kinds of actions in the economy. Not by money, but by people. I think that is a good policy. Actually, the postal system is privatized in the Netherlands.

Q: What would be the worst-case scenario if there was no change in any of the factors that you have outlined here? If the population ages with an increasing deficit would it just produce a decreased ability of the state to provide certain welfare? What would be the breaking point really? Why could Japan not keep putting this off? Where would that tipping point come?

A: I do not know. You could argue that if you do not get the budgetary problem under control you might run into increasing risk premiums, and that this might drag off deficits further because interest rates go up, etc. On the aging issue, if you do not deal with aging now then you will have to deal with it later. Aging is a simple kind of contract between generations. In this regard, it can be helpful. If you do not increase labor participation and if you do not reduce government debt, it will simply happen later. So, either your benefit rates will fall or you will have to increase taxes. Otherwise your deficits are going to explode. It is all about politics and whether politicians will face this problem now, or pass it on to a later generation.

Q: You mentioned challenges for Japanese regulatory reform and the network industry. What is the rationale for specifically pointing out network industries, and what is the status of this in the Netherlands?

A: Japan seems to have a situation where a few things go together. High electricity prices go together with network industries that are privatized but being regulated within the ministries. Usually alarms go off when prices go up because it may indicate that one of the network industries is setting prices too high. So if you do not have independent regulators, these regulators might be influenced by people who have some stake in raising prices, which lends itself towards competition.

What we did in the Netherlands concerns the energy and telecom companies. With energy we were going to legally un-bundle networks from energy distribution. The Netherlands has an independent regulator which is part of our ministry but is independent in its individual position. In the telecom field, the Netherlands does not have a separation of networks services. There is a specific regulator there too, which is only dealing with telecom, and other kinds of media competition issues that are also independent. I think that is a good thing to do.

*This summary was compiled by RIETI Editorial staff.