When Do We Start? Pension reform in aging Japan

Author Name KITAO Sagiri (Faculty Fellow, RIETI)
Creation Date/NO. July 2016 16-E-077
Research Project Fiscal and Social Security Policy under a Low Birth Rate and Aging Demographics
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Japan is going through rapid and significant demographic aging. Fertility rates have been below replacement level for four decades, and life expectancy has increased by 30 years since the 1950s. The pension reform of 2004 is expected to reduce the replacement rate, but there is much uncertainty as to when and whether the adjustment will be complete. The normal retirement age of 65 will be the lowest among major developed countries. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by three years gradually over a 30-year period. We consider three scenarios that differ in timing to initiate reform and let the consolidation start in 2020, 2030, and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising the tax burden by more than eight percentage points of total consumption. Delaying reform also implies a major tradeoff across generations and deteriorates the welfare of future generations by up to 3% in consumption equivalence.

Published: Kitao, Sagiri, 2017. "When do we start? Pension reform in ageing Japan," The Japanese Economic Review, Vol. 68(1), pp. 26-47