The Optimal Funding Method for the Social Security System

Author Name TACHIBANAKI Toshiaki  (Faculty Fellow, RIETI / Graduate School of Economics, Kyoto University) /OKAMOTO Akira  (Okayama University) /KAWADE Masumi  (Niigata University) /HATANO Toshiya  (Meiji University) /MIYAZATO Naomi (Nihon University)SHIMA Toshihiko (Graduate School of Economics, The University of Tokyo)ISHIHARA Akifumi (London School of Economics and Political Science)
Creation Date/NO. December 2006 06-J-057
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Using an overlapping, multigenerational, dynamic, general equilibrium model incorporating a benefit assessment of government expenditure, this paper examines the advantages and disadvantages of funding methods for public health insurance and nursing insurance. In addition, in regard to the parameters that must be laid down exogenously in order to conduct simulation computations, we did not conform blindly to previous research but instead attempted to redefine core elements after detailed reconsideration.

As a result of analyses through a model derived from the development and extension of existing research in this way, we conclude that the optimal funding method for medical and nursing benefits is consumption tax rather than social insurance premiums and interest tax. This conclusion arises from the fact that the disruptive effect of consumption tax is the weakest from the perspective of obstructing the accumulation of capital, and that it is in conformity with the findings of a considerable body of prior research and standard macroeconomic theory. However, the extent to which consumption tax is superior depends heavily on the setting of the parameters, and we cannot exclude the possibility that the measurements conducted in previous research were excessive regarding the advantage attributed to consumption tax.

We also focused on the degree of aging of society, in which a comparison of the stationary state in 2005 and the stationary state in 2050 showed that the degree of improvement in social welfare caused by a shift of the revenue source to consumption tax was markedly greater in 2050. In view of this, it is possible to conclude that although care should be taken in setting the parameters, in a society that has aged to an advanced degree, a shift from social insurance premiums and interest tax to consumption tax is more desirable.