Public Policy and Politics in Times of Population Decline

Part 4: Debating from the Standpoint of Lifetime Burden

OGURO Kazumasa
Consulting Fellow, RIETI

A long-term perspective is also essential when considering the burden borne by each individual.

With the retired generation increasing and a greater burden being placed on the working generation, what is important is to take into consideration the "lifetime net burden." Net burden refers to the difference between an individual's burden such as taxes and social insurance premiums paid to the government and the benefits such as public pensions and medical and nursing care received from the government.

In the case of an individual in his or her 30s who pays 1.4 million yen in taxes and insurance premiums in a certain year and receives benefits of 800,000 yen, the net burden of this individual over the same year is 600,000 yen. If this individual bears a burden of 80 million yen and receives 30 million yen in benefits over his or her lifetime, the lifetime net burden is 50 million yen. When the scale of this lifetime burden is excessively disproportionate between generations, more and more people will consider the system to be unfair.

When considering the lifetime burden, people tend to focus on tax burdens. However, revenue from social security premiums (60 trillion yen) is currently larger than tax revenue (50 trillion yen), so we need to focus also on social security premium burdens. When revenue for pensions and medical and nursing care expenditures is financed by consumption tax and other taxes, it is referred to as a "tax-financed scheme," and when underwritten by social security premiums, it is referred to as an "insurance-supported system." Nevertheless, the essence of the problem lies in the relativity of benefits and contributions.

In other words, if the revenue source is taxes and the amounts that individuals contribute are returned to them in the future, then it is proper to consider this as being an "insurance-supported system." If revenue is furnished through social security premiums yet the amounts that individuals contribute are not necessarily returned to them in the future, then such system can be characterized as a "tax-financed scheme." In reforming the social security system, rather than debating whether revenue is financed through taxes or social security premiums, discussing how the benefits and burdens are related and the degree of their relationship will be more appropriate than talking about the burden actually felt by the public.

Boston University Professor Laurence J. Kotlikoff and others have advocated the importance of "generational accounting," through which the net lifetime burden of each generation is grasped. For a period of time, the Japanese government also released such accounting index, but has stopped releasing it. It is necessary once again to provide generational accounting and engage in a more thorough discussion of net lifetime burdens while focusing on the essential difference between taxes and social security premiums.

>> Original text in Japanese

* Translated by RIETI.

October 30, 2015 Nihon Keizai Shimbun

January 27, 2016