Impact of Greater Longevity on Pension Financing

Author Name NAKATA Daigo  (Fellow, RIETI) /HASUMI Ryo  (Japan Center for Economic Research)
Creation Date/NO. March 2009 09-J-004
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Although greater longevity is coupled with a lower birthrate as one of the major causes of Japan's aging population, when it comes to factors influencing pension financing, longevity has not attracted as much attention as the birthrate. This paper quantitatively evaluates the impact of greater longevity on pension financing and examines the extent to which improvements can be expected in the sustainability of pension financing, by raising the eligibility age, using Population Projections for Japan: 2001-2050 with multiple assumptions for a longer life-span. Raising the eligibility age will improve pension financing quite considerably but this is an issue that needs to be debated in the future. At the same time, however, Japan should develop an infrastructure for social security systems and the labor market that will enable older workers to maintain their vigor as they work.

This paper also conducts a simulation analysis of pension financing by concomitantly using the pension actuarial model and the life-cycle general equilibrium model so that the effects of changes in the population structure, through longer life-spans on the macro economy, can be taken into account. By using the pension actuarial model and the life-cycle general equilibrium model together, it will be possible to examine economic assumptions used in pension financing estimates, while consistently factoring in the impact of greater longevity on wage and interest rates from the standpoint of the life-cycle hypothesis. As estimates of pension financing cover extremely long periods of 100 years or so, it is necessary to pay greater attention to factors such as the aging population and life-cycle, which can cause dynamic fluctuations at the macro level. Pension estimates produced by the Ministry of Health, Labour and Welfare use fixed economic assumptions and regardless of which population assumptions are used, the research results in this paper indicate the possibility that in time, assumptions may lose their accuracy.