Pension payments cannot be sustained
The total population of Japan peaked in 2010 at 120.83 million and is on the decline. According to the NIPSSR (National Institute of Population and Social Security Research), it is estimated that by 2070 the number will be about 60 million. In other words, the population of Japan will be halved in about 50 years.
Furthermore, looking at the age distribution, the younger generation and the working-age population (15-64 years old) are rapidly decreasing, while the elderly population (65 years and older) is increasing, and the aging rate is close to 40%.
It is thought that the aging rate will continue to rise and remain high at nearly 50%. It means that Japan will be a society where 1 in 2 people will be 65 years old or older.
In such a society, the current social security system simply cannot be maintained.
For example, the amount of public pension benefits is calculated by the income substitution rate, which is equivalent to the percentage of the average monthly income of the working generation, so-called model households. It currently stands at 61.7%.
The pension system in Japan adopts a pay-as-you-go system, so the pension that the elderly receive now is covered by the premiums paid by the working generation. It is currently fixed at 18.3% of salary.
So, in a society with an aging rate of 50%, if you try to keep the pension payments to the status quo income substitution rate of 61.7%, the premium would be, by simple calculation, about 80% of the salary of the working generation. This would not be a realistic number.
Therefore, there is no choice but to lower the amount of pension benefits. Although the Ministry of Health, Labour and Welfare says that the income substitution rate will not be less than 50%, when the burden of the working generation is to be made realistic, that would be difficult, and it would have to be about 40%.
In addition, it cannot be covered without raising the consumption tax rate to nearly 40%. However, under these circumstances, it is absolutely impossible for both the working and pension generations to maintain their current standard of living.
With a declining birthrate and a super-aging population, society is facing an isolated and helpless situation
In other words, unless we take measures right away, people in the future will be in serious trouble.
For example, as a measure to compensate for the decline in the working-age population, we can consider accepting foreign workers. In fact, the Economic Planning Agency (Cabinet Office) and others have long considered immigration as an option.
On the other hand, there is strong opposition to the idea, with concerns that the increase in immigration would lead to an increase in crime and social instability.
During the Abe administration, there was a lot of discussion about bringing women into the labor market. It was also said that that would increase the GDP by about 10%.
However, when we made the calculation based on good grounds, we found that it is highly likely that it would not reach 1%.
The cause is the wage gap. First, there is the gap between men and women. Furthermore, in recent years, the wage gap between regular and non-regular workers has become significant. In the case of women, when they leave work owing to childbirth and return to work after childbirth, there is a gap between those mothers and women who have maintained their career. As a result, women tend to be reluctant to leave work because of childbirth, leading to a vicious cycle of low birth rates.
Some argue that AI and robots will increase productivity. Certainly, I would like to hope for technological progress, but unfortunately, it has been pointed out that Japan’s technological progress is far behind the rest of the world.
In fact, international organizations such as the IMF (International Monetary Fund) have pointed out that Japan, which lags behind in technological innovation, will see its national power tumble rapidly.
In this isolated and helpless situation, we wonder if there are any effective measures. It could be considered that all we can do is to drastically cut government spending.
In other words, in order to maintain the current social security system, such as the pension system, other expenditures should be significantly reduced.
For example, the government should maintain a pension system that enables elderly people to live a minimum standard of living and make sure that premiums are not so high as to discourage working people.
It is also possible to implement various other policies at the same time, such as compensation for child support and subsidies to companies that support women returning to work after childbirth.
For example, if it is necessary to raise the consumption tax for this reason, it will be easier to obtain a national consensus.
Considering a new social system in terms of burdens and benefits
A drastic cut in government spending will lead to a review of public finances that rely on government bonds.
To begin with, the issuance of government bonds is not allowed by the ordinary law of Japan. On the other hand, as an exception, the issuance of construction bonds is approved on the basis of the idea that also future generations will be required to bear the cost of construction, because the social infrastructure developed by the bonds will be passed on to future generations.
Other government bonds can be issued by the government only for a certain period of time, exceptionally, if it is decided by the Diet (so-called deficit-covering bonds). While it is difficult to gain the understanding of the public to secure financial resources through tax increases, the method of securing financial resources through the issuance of government bonds, which will pass the burden on to the future, tends to be taken lightly politically. It is safe to say that as a result of such political judgments, Japan is now facing a huge fiscal deficit.
Our research concludes that it is impossible to continue future economic policies while maintaining such huge fiscal deficits. Sound fiscal management is essential for maintaining the rapidly super-aging society without leaving enormous debts to future generations. In economics, we look at the behavior of individuals and companies in society from the perspective of costs and benefits. Funding through the issuance of government bonds affects intergenerational burdens and benefits. It cannot be allowed for us, the current generation, to continue the policy of passing only a burden on to future generations.
Many of the various social systems in Japan today were established in the period of high economic growth after the war. At that time, while public assistance such as the development of infrastructure was advancing, the pursuit of efficiency in the private sector based on market mechanisms achieved high economic growth. The infrastructure built with construction bonds at the time is rather justifiable from the perspective of intergenerational burdens. On the other hand, the issuance of deficit-covering bonds, which are pure debts, cannot be justified because it is simply passing the burden on to future generations.
By the way, the current environment surrounding Japan is not the same as the economic environment in which high economic growth was achieved at that time. A sharp decline in the working population has begun, and a decline in the total population, which Japan has never experienced, has already begun. In addition, economic inequality is increasing in Japan and other countries. In a market-economy-oriented society such as the United States, efficient resource allocation may have been achieved. However, fairness, or economic equality, which cannot be achieved through market mechanisms, has come to be considered to have deteriorated out of its competitive environment. It is the widening gap in society.
In economics, efficiency and fairness are discussed as two major criteria, and achieving them is a major goal. It has also been believed that market mechanisms contribute significantly to achieving efficiency, while market mechanisms do not contribute at all to improving fairness.
Recently, however, the relationship between them has also begun to attract attention. For example, as an economic gap expands, society is divided into a small group of high-income earners and a large group of non-high-income earners. Since many goods and services in society are consumed by this large group of people, it is being pointed out that the overall consumption of the economy, that is, the power on the demand side, will decline, and that the increase in economic disparities may become a negative factor for the economy.
In Japan, which is rapidly entering a super-aging society with a declining birthrate and a declining total population, the rapid economic growth experienced earlier cannot be expected in the future. Under such circumstances, what kind of environment is it that will enable stable economic growth in the future? It is necessary to create an environment where each individual can conduct economic activities in a stable manner for the future. A society with a gap that widens too much is not stable.
We must correctly understand the critical fiscal situation of Japan, which already has a huge fiscal deficit, and share the correct information about the future with everyone. Furthermore, based on such correct information, each and every citizen must take responsibility and think about it on a long-term basis. Right now, it is most dangerous to leave it to others. Only we, the current working generation, can create a society that will be connected to the next generation. Now is the time to seriously consider a Japanese society that will be acceptable to future generations living in Japan.
* The information contained herein is current as of May 2021.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
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