Redesigning the Social Security System - "World standard" data must be collected through longitudinal surveys of middle-aged and elderly

Faculty Fellow, RIETI

Comprehensive development of microdata that provide foundation for policy debate is indispensable to redesigning the social security system. The United States has established an effective research system that collects and utilizes a wide range of individual information on the income, employment, and health statuses of the middle-aged and elderly; a system that is now becoming a "world standard." First and foremost, Japan must make up for its delays and catch up with the rest of the world.

Two missing perspectives

Virtually all arguments put forward thus far on the need to reform the social security system apply the same reasoning: Japan's population is aging rapidly, even by international comparison; while Japan's fertility rate remains low and there is little, if any, likelihood for a sharp recovery. The combination of population aging and low fertility translates into a decreasing number of the supporting population and a rapidly increasing number of the supported population. Consequently a broken balance between social security benefits and burdens looms, which will trigger the collapse of the social security system. Therefore, drastic reform must be implemented.

Few would dare to raise a strong objection to these arguments. But the reality remains that Japan has been unable to find a fundamental solution despite all the lengthy discussions year after year; still no tangible improvement has been made to the nation's social security system.

Two significant perspectives seem to be missing from the past arguments. To begin with, areas of social security such as pensions, medical care, and nursing care - which are closely interrelated - have been discussed separately, while links between them have been extremely weak.

In considering social security policies, most important is to think from the viewpoint of beneficiaries, not from that of the government agencies that implement the policies. No effective policy can be formulated by viewing the different roles of the elderly, as if they were separate entities; for instance, as a pensioner, as a recipient of medical services, and as a recipient of nursing care. Government policies must be evaluated on whether they, in terms of "collective effect," contribute to the improvement of the living standards of those they affect.

Another problem is that arguments have been and continue to focus exclusively on the funding side, in which social security expenditures are assumed to increase. Such arguments typically present the estimates of the aggregate cost of social security based on the projected future benefits, resulting from a systematic calculation. Of course, discussion of social security funding is extremely important. However, focusing exclusively on it blurs the view of other important issues.

In particular, the way individuals will respond to policy changes is a question that cannot be ignored. Changes in pension benefits would change the patterns of income and asset distribution by age group as well as the patterns of labor supply. Likewise, changes to the percentage of medical and nursing care costs paid by individuals would alter demand for these services.

Furthermore, the range of individual circumstances must not be ignored. Some elderly people earn a high income, are blessed with family and friends, and live in good health. Many others are on low income, in poor health, and without family. Impacts resulting from changes to the social security system are inseparable from such factors as the health conditions of individuals and their families, household economic status such as income and assets, family relationships, and social activities. Fine-tuned policies in full consideration of such variety among individuals cannot be developed from discussions focused exclusively on funding.

Countries launch cooperation to enable international comparison

Obviously, in order to create an efficient and quality social security system, the "traditional approach" of working solely on funding in a fragmented fashion with little collaboration across bureaucratic boundaries, must be abandoned as quickly as possible. It is necessary to change the way of thinking and take the viewpoint of beneficiaries in order to establish a new approach that is cross-cutting and takes individual differences into consideration. Such an approach is quite common internationally but has been missing in most arguments in Japan.

So then, what does it take to materialize the approach? It would be difficult to amass case studies in order to get an overall picture that leads directly to specific policy designs. The only way to proactively elicit people's views and concerns and link the state of their lives to social security policies is to build and then analyze the information in a database containing information on tens of thousands of individuals.

In numerous cases a government policy - social security or other - has failed to achieve its goals and ended up causing unexpected side effects. It is thus necessary to conduct a strict ex post facto evaluation of each policy, using actual data to examine whether the goals have been met, whether there have been any side effects or wasted resources, and to use the evaluation results for further institutional improvement. Eliminating waste related to social security policies is particularly meaningful because the cost of social security benefits represents a significant portion of Japan's national budget.

The U.S. Health and Retirement Study (HRS), a national panel survey of the middle-aged and elderly, is being conducted under the leadership of the University of Michigan. Similar studies are afoot in Europe and some countries in Asia such as South Korea and Thailand. Survey respondents represent a broad spectrum, ranging from pre-retirement people aged around 50 to the elderly; many of whom are medical and nursing care users. Each survey asks diverse questions about health, economic status, employment, family relations, and participation in social activities. Also common to all these surveys is that surveyors conduct face-to-face interviews with respondents, using computers and taking significant time. Tens of millions of yen have been spent on each round of the survey.

In the U.S., whenever considering a new social security policy, the White House reportedly checks with the HRS for supporting scientific evidence. Database development in the above-mentioned countries is being carried out as part of an international joint project and surveys are, through close coordination among country leaders, deliberately designed to allow for international comparison.

Indeed, Japan is about the only developed country left behind the ongoing move toward creating a "world standard" database. Not only has this delayed the evaluation of social security policies, it has created a situation where Japan, despite being closely watched by the rest of the world, has been unable to offer valuable experience as the country at the forefront of population aging.

Japan standing at crucial point in shifting to beneficiary-oriented system

Though belatedly, moves toward conducting large-scale, world standard longitudinal surveys of middle-aged and older people have begun to emerge. Starting from April 2005, a group of enthusiastic researchers led by RIETI President and CRO Masaru Yoshitomi have been vigorously working toward this end. Following the completion of two preliminary surveys, the first full-scale survey was launched in January 2007. The project has obtained strong support from five local governments and linkage with the data on detailed statements of medical and nursing care costs is gradually being developed.

Japan's earlier, segmented attempts to conduct longitudinal surveys of middle-aged and older people fell far short of the world standard. However, the latest survey projects such as RIETI's are gradually making it truly possible to evaluate social security policies and develop social security programs firmly based on empirical findings. Personal data collected through surveys, processed so as to protect the individuals' identities, will be made available for researchers under restricted conditions, enabling the objective examination of policy effects.

The data will enable clarification of points that, to date, have not been sufficiently clarified. These are just a few examples:

  1. Do people have sufficient funds upon retirement to support the rest of their lives? What roles should public pensions play in supporting retirement? Answers to these two questions will clarify what constitutes an appropriate allocation of pension benefits.
  2. What are the reasons behind the unusually high retirement age in Japan? This is a topic of great interest to European countries where the spread of early retirement is causing a rapid increase in social security burdens.
  3. What impacts do the pension system, the system of mandatory retirement at a fixed age, and the health status of the elderly have on labor supply? This is important from the viewpoint of how Japan should prepare for the predicted labor shortage.
  4. How should roles be allocated between in-home and facility-based nursing care? What types of people can rely on family care? Is the existing nursing care system truly improving the quality of life for those receiving its services? While Japan possesses the greatest longevity in the world, why is the proportion of Japanese who consider themselves happy smaller than in other countries?
  5. When the price of medical and/or nursing care or the proportion of the price paid by individuals is raised, does it reduce unnecessary benefits or hinder the provision of necessary benefits? In what type of people can such effects be observed? What are effective measures to prevent the deterioration of health conditions, i.e., an increase in the level of care needed? Clarifying these points is essential for reforming the medical and nursing care systems.

A world standard survey would require the knowledge and dedication of researchers as well as sufficient understanding of the survey both by public institutions involved and individuals it targets. Although such a survey would cost tens of millions of yen, the amount represents less than 0.001% of the annual cost of medical and nursing care. A large-scale research project undertaken by Hitotsubashi University has been newly included to help conduct the first full-scale survey, which aims ultimately to collect data samples from some 10,000 individuals.

For the continuation of similar surveys in the future, it is imperative to gain the understanding of a large number of local governments and develop multifaceted cooperation among foundations and other entities concerned with social security. When such attempts are righted, Japan will make headway toward beneficiary-oriented social security policies and its accumulated knowledge will be utilized the world over.

>> Original text in Japanese

* Translated by RIETI.

March 16, 2007 Nihon Keizai Shimbun

April 12, 2007