In order to raise the sustainability of the social security system in an aging society, it is not enough to only cut benefits or increase social security taxes. It is also important to expand the number of people paying into the system. In particular, raising the labor force participation (LFP) rate of the elderly is a promising solution to the problem. This is because turning recipients of social security payments into contributors to the system can substantially reverse the pressure an aging society exerts upon social security.
In February 2018 the Cabinet approved the "Guideline of Measures for Ageing Society," which proposes letting the elderly defer receipt of social security payments even past the age of 70. This is one of the reasons why expanding labor force participation of the elderly has become an important policy goal for the government. The Fiscal System Council and others, too, have taken up proposals to raise the pensionable age to 68. The plan to raise the LFP rate of the elderly should become an important focal point during the next round of pension reform.
♦ ♦ ♦
To what maximum extent can the elderly labor force participation rate be raised? Even if one asked the elderly to continue working, not all of them would be able to keep working the same way they were before. Due to health limitations, some will quit their jobs or be forced to reduce working hours or days per week.
With the cooperation of Satoshi Shimizutani at the Ministry of Internal Affairs and Communications, I examined how much LFP among the elderly could be raised overall when considering only health limitations. My calculations are as follows.
First I investigated the health status of people in their fifties, based on the Ministry of Health, Labour and Welfare's 2016 Comprehensive Survey of the Living Conditions (CSLC). The CSLC provides detailed information on an individual basis about health factors such as doctors' diagnoses of approximately 40 diseases, impediments in daily life, hospitalizations, personal assessments of patients' own health and tobacco and cigarette smoking. Furthermore, from the Ministry of Health, Labour and Welfare's 2016 Simple Life Table I used average life expectancies as representations of each age group's average health status. Then I used a weighed model to investigate the relationship between the employment status of people in their fifties and various health variables.
Next, assuming that the relationship between health and employment does not change with increasing age, I applied it to the actual health status of individuals in their sixties to calculate individual employment probabilities and derive the mean for each age group. This mean represents the latent LFP rate for each age group based on health factors. While it is important to note that no factors other than health have been considered, the findings indicate that there is room to raise LFP to the same extent that the latent LFP rate exceeds the actual LFP rate.
The figure shows the calculated results by gender. The LFP rate is 90.2% for men in their fifties, but drops to 75.5% for men in their early sixties and to 52.5% for men in their late sixties. The latent LFP rate, which only looks at health factors, on the other hand, only falls to 87.8% in men's early sixties and 86.2% in their late sixties.
The reason for the limited difference is that health deterioration between one's fifties and sixties is generally limited. As a result we see that there is room to increase the LFP rate of men in their early sixties by 12.4 points and that of men in their late sixties by 33.7 points.
No significant difference in the pace of health deterioration compared to men exists for women, but the pace at which the latent LFP rate falls increases somewhat. This is because the greater diversity in life- and working styles among women means that their employment is more easily affected by their health. The room for increasing the LFP rate for women in their sixties at 10.5 points in their early sixties and 22.1 points in their late sixties is slightly smaller than that for men.
Since I am not taking into account the influence of any factors other than health, we must be careful when interpreting the results. Be that as it may, one cannot overlook the implication that based on the data, more than 30% of men in their late sixties and more than 20% of women in their late sixties do not work, regardless of their health. Of course we cannot criticize those who are not working. Retiring from work and becoming a pensioner once one reaches retirement age and becomes old enough to collect pension payments, with limited opportunities for renewed employment, is an extremely rational choice.
However, what if we look at this from the perspective of society at large? The present system, which moves people from the category of those who, based on health considerations, could still support society to that of those who are being supported, is problematic. This is even more obvious when we consider the many respondents of middle and advanced age who respond in various government surveys that they would like to continue working as long as they are healthy.
♦ ♦ ♦
So what should be done? The most immediate solution would be to raise the pensionable age. Actually, when applying the above calculations to the data for 2001, we see that the room for increasing the LFP rate of people in their early sixties is moderately smaller for the 2016 dataset. This reflects the boost which the continued employment of workers in their early sixties received from the gradual increase in the pensionable age that began in 2001, along with a trend towards delayed retirement and an economic recovery.
The government is extremely careful when it comes to raising the pensionable age. Instead it has been proposed to extend the maximum age until which receipt of benefits can be deferred. However, the current benefit deferment system is unattractive and there are very few elderly applicants. This is because the increase in payments due to deferment is reduced if one defers retirement benefits while working on an above-average salary.
It appears that this system was established to preserve consistency with the old-age pension system for active employees, which reduces pension payouts if the recipient continues to work and receive work wages. Hence, under the current deferment system, labor force participation is depressed for the same reason as when applying the old-age pension system for active employees.
Given the extent and pace of aging of the Japanese population, the most practical approach would be to uniformly raise the pensionable age and use the increased tax and social insurance revenue to increase benefit amounts. When the "macroeconomic slide" that automatically adjusts the level of pension payments becomes fully effective, pension payments after its establishment will be reduced significantly. In addition, the number of current workers contributing little money to the system due to irregular employment and the like is increasing and the danger of an expansion of poverty in old age is growing.
In light of this, we should consider focusing retirement benefits on securing an income for older age groups and asking people in their late sixties who can still work to switch to supporting the social security system.
On the other hand, raising the retirement age will be fiercely opposed by the population. Other countries have needed significant time to implement such changes. Implementation also requires substantial political energy. Therefore, if there is a policy that can complement the effects of raising the pensionable age, a reasonable response should be to aim to implement this policy. In this sense, putting an expansion of elderly labor force participation to the forefront of reforms is not a bad idea.
In order to accomplish this, however, it is necessary to eliminate factors that depress labor force participation in the current system as much as possible. The old-age pension system for active employees is a representative example along with deferred benefit payments, which are unlikely to spur labor force participation in their current form. The old-age pension system for active employees must first be abolished.
♦ ♦ ♦
Employment circumstances for the elderly must also be reconsidered. Even if we asked private companies to extend the retirement age for their employees and required them to continue to employ retirees as full-time regular employees, success would likely be limited.
After reaching old age, the elderly should also have the option to choose a lifestyle that allows them to fit their work into their particular circumstances in a way that they are not bound to a company or experience adverse health effects. This is already somewhat the case in Europe and the United States, and we can hope for increasingly diverse and independent types of work that will allow the elderly to use their acquired skills, knowledge, and experience to earn compensation for undertaking work for companies to drive up labor force participation.
According to the Ministry of Internal Affairs and Communications' Labor Force Survey, in 2017 approximately 75% of employees in their late sixties were in irregular employment, and approximately 82% of the overall increase in employment of the same age group over the past 15 years can actually be explained by an increase in irregular employment. Though reemployment after retirement may be the primary focus, I wonder if we cannot connect this effort to the diversification of work styles for the elderly. If we want to increase the elderly's LFP rate, we need to put the elderly at the center of work reform.
* Translated by RIETI.
October 3, 2018 Nihon Keizai Shimbun
