RIETI Report July 2018

From the Perspective of Ensuring Fiscal Soundness: Recovery through structural reforms

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The low birthrate and aging population in Japan, along with a steady increase in social security spending, has resulted in fiscal tightening that will last for a considerable period and needs to be addressed from a long-term perspective. Detailed inspections of government spending and review of tax items at the yearly fiscal soundness discussions are extremely important, but such discussions are clearly not keeping up with the massive scale and the rapid speed of the aging of the population. Increasing household income underpinned by improved productivity and social security reforms is a key to recapturing fiscal discipline. In the July issue of the RIETI Report, we present "From the Perspective of Ensuring Fiscal Soundness: Recovery through structural reforms" featuring Faculty Fellow Sagiri Kitao.

Kitao discusses policies to ensure medium- to long-term growth and fiscal soundness. First, she looks at the burden of the national pension plan, and proposes raising the pension eligibility age from 65 to 70 along with other choices. Such action will help to not only reduce the long term burden but also enhance the elderly's willingness to work and improve productivity. Kitao then talks about employment style improvement, whereby maximizing the skills of each worker is important and will lead to improved productivity, higher wages, and better opportunities. Finally, Kitao stresses that Japan needs to change the standards by which growth is measured and engage in major structural reforms, and the goal is a system in which all workers, regardless of age, employment type, or marital/dependent status, pay a uniform social insurance premium and support the finance by contributing according to their income.

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From the Perspective of Ensuring Fiscal Soundness: Recovery through structural reforms

KITAO SagiriFaculty Fellow, RIETI

The fiscal tightening resulting from the low birthrate and the aging population and the steady increase in social security spending will continue for several decades and has become an issue that needs to be addressed from a long-term vision. Detailed inspections of government spending and review of tax items at the yearly fiscal soundness discussions are extremely important. However, such discussions are clearly not keeping up with the massive scale and the rapid speed of the aging of the population (See Figure). The key to regaining fiscal discipline will be the increase in household income underpinned by improved productivity and social security reforms that will reinforce such channels. This article will discuss policies to ensure medium- to long-term growth and fiscal soundness.

While the eligibility age (65 years old) for national pension benefits in Japan has not changed since the universal pension was first adopted in 1961, the average duration of receiving benefits has increased from three years to approximately 20 years in conjunction with the continuing rise in average life expectancy. The burden of continuing the national pension plan continues to grow, and employee pension premiums on earnings, which are paid equally by employers and employees, rose from 3.5% in 1961 to 18.3%. With the addition of medical and nursing care expenses, there is little room for the working population to bear any additional fiscal burden.

To read the full text
https://www.rieti.go.jp/en/papers/contribution/kitao-sagiri/01.html

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