NIRA OPINION PAPER
No.34| March 2018

The Future presented by Japan’s Population Trends- Who will bear the Financial Burden of Social Security? Akira Morita
Yasushi Iwamoto
Takashi Oshio
Hitoshi Suzuki
Nanako Tamiya

Professor, Department of Policy Studies, Tsuda University
Professor, Graduate School of Economics, The University of Tokyo
Professor, Institute of Economic Research, Hitotsubashi University
Managing Director, Policy Research Department,
Daiwa Institute of Research
Professor, Faculty of Medicine/Director, Health Services Research andDevelopment Center, Tsukuba University

Tadashi Fukui
Noriyuki Yanagawa

Professor, Division of Economics, Kyoto Sangyo University
Executive Vice-President, NIRA / Professor, Graduate School of
Economics and Faculty of Economics, The University of Tokyo

In the 2020s, Japan’s baby boom generation will enter their “latter-stage elderly”
years; in the latter half of the 2030s, the “second-generation” baby boomers will become
elderly. In addition to this, the decline in the working generations will be ongoing. The
dramatic progression in the aging of Japanese society which is inevitably coming is
confronting the nation with major issues. In order to gain a clear perspective on theeffect of this reality, the authors conducted an estimate of future expenditure on social
security up to fiscal 2041, focusing in particular on changes in the population structure.
The results of estimation taking into consideration policies currently being put
into effect indicated that social security expenditure would increase from 21.5% of GDP
to 24.5% (in terms of nominal values, this represents an increase from 116.2 trillion yen
to 190.7 trillion yen). The aging of Japanese society will see a significant increase in
expenditure for medical and nursing care, with the increase particularly high in thearea of nursing care. With a simultaneous increase in the population needing to besupported and decline in the population providing support, a considerable burden will
be placed on the working generations. In the case of medical care, in addition to
population factors, the rapid advancement of treatments and technologies must also beborne in mind.
Against the background of the nation’s ongoing difficult fiscal situation, it goes
without saying that the problems facing Japan’s social security system represent anurgent policy agenda. As the aging of the population progresses, numerous issues must
be addressed, including reform of the structure of benefits and burdens and theformulation of responses for people facing ever-greater risk. It is vital that we embracea realistic vision of Japan’s future and proceed steadily with the implementation ofpolicy efforts on this basis.

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The decline in Japan’s birthrate and the aging of the nation’s population will continue
into the future. In 2025, Japan’s baby boom generation will enter their “latter-stage elderly”
years; in the latter half of the 2030s, the “second-generation” baby boomers will become elderly.
In addition to this, the decline in the working generations will be ongoing. This unavoidable
change in Japan’s population structure will have a significant impact on social security. In order
to allow us to take a clear perspective on this reality, it is vital that we identify medium- to longterm trends in social security expenditure and formulate responses on this basis. However, since
the Ministry of Health, Labour and Welfare published estimates of future social security
expenditure as part of its discussions towards integrated reform of the social security andtaxation systems in 2012, estimates have not been updated, and we have not delineated a vision
beyond 2025, a mere eight years away. Focusing on changes in the nation’s population structure
due to the declining birthrate and aging population, the authors therefore conducted an estimateof social security-related expenditure up to fiscal 204112.

Future Outlook for Social Security Benefit ExpenditureConsidered in terms of ratio to GDP, social security benefit expenditure will increase from
21.5% of GDP in fiscal 2016 (116.2 trillion yen in terms of nominal values) to 24.5% (or 190.7
trillion yen) in fiscal 2041, representing a three percentage point increase3 (see Figure 1). This
corresponds to consumption tax revenue for a rate of 6%.
Looking at a breakdown of these figures, reflecting the fact that there will be a significant
increase in the percentage of the population aged 65 and above, medical benefit-related
expenditure will increase from 7.0% of GDP in fiscal 2016 to 8.5% in fiscal 20414. Expenditure
related to benefits for nursing care will more than double, from 1.8% of GDP in fiscal 2016 to 3.9%
in fiscal 2041. The scale of these increases is not exclusively due to the fact that the percentage ofthe population aged 65 and above will increase, but is also a result of the fact that the percentageof the population aged 80 and above, which makes particularly high use of nursing-care services,
will also increase. Expenditure on medical and nursing care combined will increase from 8.7% of
For further details regarding the estimates discussed in this paper, please refer to the more extended version of thepaper published on NIRA’s website. Estimates related to medical and nursing care were conducted by Yasushi Iwamoto
and Tadashi Fukui; estimates for other policy areas were mainly conducted by Daisuke Ozaki and Mari Kawamoto of
NIRA.
2 Estimates were conducted until 2041 in consideration of the policy cycle in the areas of medical and nursing care.
The period of the 3rd Term Medical Expenditure Optimization Plan has been extended to six years from the previous
five, synchronizing it with the Insured Long-term Care Plans, which are formulated on a three-year cycle. This realizes
a further level of cooperation between the implementation of measures in each field. In accordance with this policy
cycle, fiscal 2041 was selected as the final year for the estimates because it will be the year in which four cycles of theMedical Expenditure Optimization Plan (24 years) will be completed.
3 Total benefit expenditure is based on social security benefit expenditure as indicated in social security expenditurestatistics. The baseline scenario in the Economic and Fiscal Projections for Medium to Long-term Analysis (Cabinet
Office, January 23, 2018) was employed for the economic preconditions until fiscal 2027. Following fiscal 2027, it was
assumed that the wage growth rate and inflation rate for the final fiscal year of the Economic and Fiscal Projections for
Medium- to Long-term Analysis would be maintained. The wage growth rate was estimated based on the “Health andLong-term Care Insurance Model” developed by Yasushi Iwamoto and Tadashi Fukui.
4 Medical expenditure in this estimation was based on national medical care expenditure, and included public medical
assistance provided by welfare benefits. It should be borne in mind that the expenses contributed by patients and thoserequiring nursing care was not included in this estimate.
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GDP in fiscal 2016 to 12.4% in fiscal 2041.
At the same time, expenditure on pension benefits will register a slight decline, from
10.4% of GDP in fiscal 2016 to 9.8% in fiscal 2041. This is due to the “macroeconomic slide”
mechanism, which will automatically reduce the level of pension benefits in line with the reductionin the working population and the extension of average lifespan, thus controlling expenditure on
benefits in order to ensure the long-term viability of pension financing.
Expenditure related to children and child-raising will decrease from 1.4% of GDP in
fiscal 2016 to 1.3% in fiscal 2041. Policies currently being implemented seek to enhance relevant
services; and taking into consideration the decline in the population of children that willcontinue following this, the level of expenditure will remain largely unchanged.
Figure 1: Future outlook for social security benefit expenditure

The Burden placed on Working Generations
For a social security system which is based on a pay-as-you-go funding mechanism reliant
on insurance premiums and tax revenue, a further increase in the elderly and decline in theworking generations means an increase in the population being supported and a decline in the
population providing support. This will lead to a rapid increase in the financial burden on eachmember of the working generations.
Under the current system, approximately 50% of an increase in medical and nursing carebenefits would be funded by revenue from the payment of insurance premiums by the person
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concerned or the proprietor of a business; the remainder would be publicly funded fromconsumption tax revenue. The burden of medical insurance premiums will increase from 3.7% of
GDP in fiscal 2016 to 4.3% in fiscal 2041 (from the perspective of Japan Health Insurance
Association premium rates, the increase will be from 10.0% to 11.4%). The increase in the burdenof nursing care insurance will be greater, with the premium burden increasing 2.2-fold, from 0.8%
of GDP in fiscal 2016 to 1.7% in fiscal 2041. The burden on public funding will increase from 3.5%
of GDP in fiscal 2016 to 5.5% in fiscal 2041, an increase of 2.0 percentage points (see Table 1). This
corresponds to consumption tax revenue for a rate of 4%.
Table 1 :Trends in public burden and insurance premium burden for medical and nursing care
Fiscal2016

Fiscal2041

Rate of change(Against fiscal 2016)

3.5%

5.5%

1.6

Medical care

2.5%

3.4%

1.3

Nursing care

1.0%

2.1%

2.2

4.5%

6.0%

1.3

Medical care

3.7%

4.3%

1.1

Nursing care

0.8%

1.7%

2.2

Public burden (Ratio to GDP)
Total

Insurance premium burden (Ratio to GDP)
Total

(Note) Estimated burden in relation to insurance benefits based on the “Health and Long-term Care Insurance
Model” (In the case of medical care, the burden in relation to medical expenditure covered by medical insurance
within national medical expenditure; the scope differs from Figure 1). The public burden is made up of thenational and regional government burden in relation to Japan Health Insurance Association, national healthinsurance, late-stage elderly medical care insurance and long-term care insurance benefits, and the nationaland regional government burden in relation to funding of the late-stage elderly medical care system andcontributions to the long-term care insurance system. Rate of change does not necessarily agree with statedfigures due to rounding off.
(Source) Same as Figure 1.

Focusing on the Effects of Changes in Population Structure
When long-term projections are published, interest focuses on the degree to which they
hit the mark. The purpose of the estimates discussed here, however, is not to realize certainty, butrather to provide the basis for discussion that will guide policy in a more desirable direction in
future. The intention is to sketch out a general direction based on the current situation, a visionof the most likely future. To this end, the particular focus in these estimates was the effect ofchanges in Japan’s population structure.
Estimation of expenditure for medical and nursing care employed the “Health and Longterm Care Insurance Model” developed by Yasushi Iwamoto and Tadashi Fukui. The basic
assumption of this model is that multiplying medical and nursing care expenditure per person in
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each age cohort by the population makes it possible to see the effect of medium- to long-termchanges in the population structure. For the economic preconditions, of the two scenarios
published in the Economic and Fiscal Projections for Medium to Long-term Analysis (Cabinet
Office, January 23, 2018), the analysis selected the more reliable baseline scenario, which assumes
economic growth in accord with the current potential growth rate. However, the Cabinet Officeestimates only extend to fiscal 2027; the economic preconditions for fiscal 2027 were used for theyears from 2027 onwards in the analysis discussed in this paper.
Estimates were conducted for medical care based on the assumption that the effects of
the 3rd Term Medical Expenditure Optimization Plan and other initiatives would continue to be
manifested. Given that this plan seeks to control medical costs, the authors projected that the ratioof medical care expenses to GDP would increase only slightly until fiscal 2023, but taking into
consideration the fact that increases in the general price level and real wages would be reflectedin the cost of services, assumed that following this, the rate of increase in unit costs would follow
the nominal wage growth rate. Because of this, only changes in population structure were reflectedin trends in the ratio of medical expenses to GDP in this analysis.
In the case of nursing care, the analysis took into consideration fuller use of services andthe effect of the transition of elderly patients from long-term hospitalization to nursing careservices, based on estimates published by the Ministry of Health, Labour and Welfare during
discussion of the integrated reforms, and assumed the same rate of increase in unit costs from2025 onwards as for medical care.
As in the case of government Financial Verifications, the estimates were calculated withpublic pension benefits divided into basic pension, employees’ pension (welfare pension), andnational pension. For the basic pension and employees’ pension, the amount of benefit expenditure
prior to adjustment by the macroeconomic slide was estimated based on estimates of the numberof pension recipients and nominal wages; in order to estimate the post-adjustment amount ofbenefit expenditure, this figure was multiplied by a rate of reduction based on the rate ofadjustment by the macroeconomic slide assumed in the fiscal 2014 Financial Verification. In thecase of national pensions, estimates were conducted with consideration of the rate of population
decline5. The economic preconditions were the same as those employed in the case of medical andnursing care.
Child- and child-care-related expenditure was estimated by obtaining actual figures foreach system based on Ministry of Health, Labour and Welfare estimates conducted at the time of
the integrated reforms and reflecting the decline in the relevant population of children. Taking
into consideration the Outline of Measures to address the Declining Birthrate and other initiatives
launched following the integrated reforms, the child-care-related policies in the New Economic
Policy Package published at the end of 2017 have been incorporated as much as possible. It should
be noted that the establishment of a child-care environment of the type sought by these policies
The estimation methodology employed in the pension section of the Long-term Fiscal Estimation Tool (Beta version;
Version 6.2, updated on June 2, 2016) developed by the Tokyo Foundation for Policy Research was used as a referencein the estimation of public pension benefit expenditure. The number of pension recipients was based on the estimate
employed in the FY2014 Financial Verification. Other pension benefits (public employees’ pensions, etc.) were
estimated based on social security expenditure statistics and added to pension benefit expenditure.
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might have the potential to increase the birthrate, but this has not been considered in the analysis
under discussion.

Discussion based on the Outlook for Benefits and Burdens is Essential
The estimates conducted in this analysis indicated that the effect of changes in the
population structure alone would increase the scale of benefit payments by an amountcorresponding to a consumption tax rate of 6%, and that the burden on the working generations
would increase. Even at present, the basic fiscal balance at both national and regional levels isrecording an enormous deficit (a debt-to-GDP ratio of approximately 3.0% in fiscal 2016). In
addition, if we consider the fact that in the future, about half of medical and nursing care benefits,
which will increase due to population factors, will be publicly funded, a revision of the burden on
citizens is unavoidable.
Particular attention should be focused on nursing care, because here the amplitude of theincrease in expenditure will be greater than in the case of medical care due to the progress of aging
among the elderly. There has been little advance in concrete discussion of nursing care expenditure
by comparison with the streamlining of medical care expenditure; it will be necessary in future to
give more attention to issues including the best direction for the system.
In the field of medical care today, high-priced drugs are being developed and treatments
advanced at a remarkable pace, and this pace is expected to accelerate still more. The estimates
discussed here incorporated the possibility of increases in medical expenditure due to increases in
the advancement of medical care to a certain degree, but it is possible that rapid increases in thelevel of advancement in the field could cause a further upswing in expenditure.
In addition to this, the authors would like to point to the problem of reduction of the levelof benefits as an issue for the pension system. Adjustment of the level of benefits by themacroeconomic slide will be essential to the maintenance of pension funding, but the fact that themechanism largely failed to function in the past under conditions of deflation has extended theperiod for adjustment of the basic pension, with the result that a reduction of the pension is
projected for the future. Because of this, there is a possibility that elderly people whose working
wage was low and who do not possess the assets required for their daily expenses in their old age
will require welfare payments. Estimates calculated by Seiichi Inagaki suggest that the income of
approximately 40% of single or divorced elderly women may be at or below the level at which
welfare is required in 20406 . It will be essential to engage in policy discussion regarding theprevention of poverty among the elderly, for example by expanding the scope of recipients of
employee’s pensions.

Reform of the System of Provision of Medical and Nursing Care and Increased
Productivity
6 Inagaki, S., “Simulation Analysis of Increasing Poverty among Elderly Japanese Women,” Pension and Economy, Vol.

35, No. 3, pp. 3-10.
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In addition, advancing discussion of reform of the system of provision of medical andnursing care will be important to the ability to control expenditure without any decline in thequality of care. It will be essential to actively implement (with consideration of regional
differences) initiatives including integration of the management of medical facilities, reform of thesystem of provision of services, and the realization of increased productivity and reduced costs
through the use of information and communications technology on the basis of cooperation
between the public and private sectors.
While the Ministry of Health, Labour and Welfare estimates published at the time of theintegrated reforms used as one of the preconditions for the present estimates assumed a certain
increase in the use of nursing care services due to factors including an increase in single-personhouseholds, as the aging of Japanese society proceeds, personal care by family members and others
will play a greater social role. The total amount of hours expended annually per person on personal
nursing care was 18.1 in 2016; this figure is expected to increase to 36.6 in 2040. As a result,problems including the psychological burden on family members providing care and decline intheir standard of living will represent policy issues.
It goes without saying that the problems that will be faced by Japan’s social security
system as the nation’s tight fiscal management continues are urgent policy issues. The change in
population structure being experienced by Japan has the potential to significantly change thefuture direction of Japanese society. The issues are numerous, including reform of the structure ofbenefits and burdens that has prevailed up to the present, and the putting in place of responses
for those facing increased risk. It is vital that we proceed with the implementation of policy witha clear vision of the real future that faces Japan.

Column: Will Economic Growth solve the Problem?
The discussion in this paper is based on the results of estimates for the baseline scenario
in the Cabinet Office’s Economic and Fiscal Projections for Medium to Long-term Analysis(January 23, 2018); however, the Economic and Fiscal Projections also contains a growth scenario,
in which the economy realizes a high level of growth. The nominal economic growth rate in 2027
is 1.7% in the baseline scenario, and 3.5% in the growth scenario (2027 nominal GDP is 668 trillion
yen in the former scenario, and 758 trillion yen in the latter).
The authors therefore also conducted estimates for the high-growth-rate scenario.
Assuming that the wage growth rate derived on the basis of the Cabinet Office estimates remained
fixed at the fiscal 2027 rate from fiscal 2027 onwards, the nominal economic growth rate wasestimated with consideration of the reduction in labor power. The results showed a ratio of total
benefit expenditure to GDP of 23.6% in fiscal 2041 for the growth scenario. This figure is one
percentage point lower than the figure of 24.5% for the baseline scenario, and 2.1% higher than
the figure for fiscal 2016.
Naturally, this result was significantly affected by the preconditions for the estimates.
However, as this indicates, it is not self-evident that the burden of medical and nursing care will
be reduced even if the economy achieves a high rate of growth. This is due to the fact that in a
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situation of high growth, the general price level and real wages will increase; an increase in thegeneral price level will increase the cost of medical and nursing care services together with theGDP, and if real wages increase, the personnel costs for medical and nursing care services will also
increase. Based on this argument, it is not a given that economic growth will help us avoid anincrease in the burden associated with social security expenditure.
Figure 2: Outlook for social security benefit expenditure:
Comparison of baseline and growth scenario

Akira Morita
Professor, Department of Policy Studies, Tsuda University
Yasushi Iwamoto
Professor, Graduate School of Economics, The University of Tokyo
Takashi Oshio
Professor, Institute of Economic Research, Hitotsubashi University
Hitoshi Suzuki
Managing Director, Policy Research Department, Daiwa Institute of Research
Nanako Tamiya
Professor, Faculty of Medicine/Director, Health Services Research and Development Center,
Tsukuba University
Tadashi Fukui
Professor, Division of Economics, Kyoto Sangyo University
Noriyuki Yanagawa
Executive Vice-President, NIRA / Professor, Graduate School of Economics and Faculty of
Economics, The University of Tokyo

This is a translation of a paper originally published in Japanese.
NIRA bears full responsibility for the translation presented here. Translated by Michael Faul.
Copyright Ⓒ 2018 Nippon Institute for Research Advancement8