COVER STORY • Exploring for the Best Models of an Aging Society – Lessons from Japanese Experience • 1

Towards a Long-term
Vision of Japan’s Social
Security System
AuthorMamoru Maekawa

By Mamoru Maekawa
Why There Is a Need for Social Security System
Reform
1. What has been lacking in past discussions
On social security system reform, it is said that swift reform isrequired by 2025 when all of those from the baby boom generation(born between 1947 and 1949 after World War II when around2,700,000 babies were born each year) reach 75 years of age orolder. While various discussions have been conducted, there has
been a lack of discussions in some areas, and therefore not only is
the real need for reform not understood, but the content of such
reform has been limited. To be more precise, there are four main
aspects to this issue.
First, the reason for the need to reform is too skewed towards thefinancial aspect. In other words, it is asserted that the content ofsocial security has to be reduced because the required financial
resources cannot be secured. This fits the basic principle ofhouseholds and corporations to “consider expenditure according toincome”, and is thus very easy to understand. But when discussions
on reform begin with this reasoning, they then lead on to whichareas of social security should be reduced, and tend to end up in azero-sum discussion to protect vested interests. Today’s social
security is entirely different from the relief of the poor in the past,and it has shifted to become the basis of res publica in Japan withthe aim of securing decent livelihoods for all. Therefore, discussions
should first begin by determining what type of social security isneeded for Japan today, and then consider how to secure thenecessary financial resources, or “consider income based onnecessary expenditure”.
Second, concerns are also skewed towards the decrease in total
population and increase in elderly citizens. Of course, the population
estimate is highly accurate, and full consideration needs to be takenof future projections which show Japan’s current (2018) total
population of 126.44 million decreasing to less than 120 million in
2029 and to less than 100 million in 2053, while the number of
elderly citizens aged 65 or above will continue to rise from 35.58
million (28.1%) in 2018 to reach a peak in 2042 at 39.35 million(36.1%). But if the decrease in total population and increase inelderly citizens attract too much attention, discussions tend to lead
towards how to reduce pensions or medical expenses for elderly
citizens and how to bear that cost, leading again to a zero-sum
discussion between the elderly and other generations, or among
elderly citizens themselves.
The above two are important issues, but bear the challenge of
4 Japan SPOTLIGHT • July / August 2019

being biased to one aspect of the discussion. In addition, there are
two other issues that, although important, are considered less sowhen discussing social security reform. These are the issue ofenhanced consumption and revitalization of the economy throughsocial security, and the issue of maintaining regional communities.
The following explains these four points in more detail.

2. Financial restrictions(1) Massive expenditure continues to be required in the future(Chart 1):
Although the reason for the need to reform is biased towards
financial restrictions, the size of current social security is massive, at¥121.3 trillion for fiscal 2018, which is 21.5% of nominal GDP. This
will continue to increase as the aging population continues toprogress. Looking ahead, the “Future Outlook for the Social Security
System Towards 2040 (Material for Discussion)” was compiled
jointly by the Cabinet Secretariat, the Cabinet Office, the Ministry of
Finance, and the Ministry of Health, Labour and Welfare andpresented to the Council on Economic and Fiscal Policy on May 21,
2018. According to an estimation conducted under set assumptions,social security as a percentage of GDP for fiscal 2040 is forecasted
to be around 24%, which is a 2.5% increase from the current

CHART 1

Future outlook for social security
benefit costs
Percentage of GDP in ( )(trillion ¥)188.2～190.0(23.8～24.0%)
9.4 (1.2%)
13.1 (1.7%)

OthersChildren/Child care
Nursing care
Medical care

Pensions

121.3(21.5%)
6.7 (1.2%)
7.9 (1.4%)
10.7 (1.9%)

39.2(7.0%)

56.7(10.1%)

140.2～140.6(21.7～21.8%)
7.7 (1.2%)
10.0 (1.5%)
15.3 (2.4%)①:47.8(7.4%)②:47.4(7.3%)

59.9(9.3%)

25.8 (3.3%)①:66.7(8.4%)②:68.5(8.7%)

73.2(9.3%)

Fiscal 2018

Fiscal 2025

Fiscal 2040

GDP
: ¥564.3 trillion
Insurance premium charge :12.4%
Public expenditure charge :8.3%¥645.6 trillion
12.6%
9.0%

¥790.6 trillion
13.4～13.5%
10.1～10.2%

Source: Extracts from the “Future Outlook for the Social Security System Towards 2040”,
submitted by the Ministry of Health, Labour and Welfare to the Council on Economic
and Fiscal Policy on May 21, 2018https://www.jef.or.jp/journal/

COVER STORY 1

percentage. This appears small at a first glance, because thispercentage represents a share of GDP which includes the assumed
growth in nominal GDP for the future years (around 2% until 2027
and 1.3% after 2028), but the monetary value for fiscal 2040 was anincrease of roughly ¥70 trillion from the current value to around¥190 trillion, which is 1.56 times the current size. The breakdown is
1.3 times for pensions, 1.8 times for medical care, and 2.4 times fornursing care, and it shows that the extension of average life
expectancy as well as development in medical and pharmaceuticaltechnologies have contributed to greater growth in medical care andnursing care compared to growth in pensions.
Of course, limiting the increase in individual social security
payouts is necessary. Raising the starting age for pension payouts as
average life expectancy rises is inevitable, and there are manyreforms that will contribute to improving the quality of life for eachindividual and there are those that will lessen medical and nursing
expenses, such as disease prevention, nursing care prevention, andpromotion of health data. However, the important aspect is thatsocial security expenditure is different from discretionary
expenditures such as public works and defense in that it is directly
related to people’s lives and daily lifestyles, and thus there is a limit
to how much can be reduced regardless of the availability of financial
resources.
(2) Largest factor of increase in Japan’s expenditure is social
security (Chart 2):
Year after year, enormous effort and time has been put intocreating government budgets, and the 30 years of the Heisei period(fiscal 1989 to fiscal 2018) could be condensed in one sentence suchas: “Japan was unable to cover expanding social security
expenditures with tax revenues, a phenomenon which came with an
expanding aging society, and thus saw an increase in issuance ofgovernment bonds.”
Of the major items of expenditure, growth in social security
expenditure is striking. The ¥10.89 trillion recorded in fiscal 1989
increased by three times to ¥32.97 trillion in fiscal 2018, but
considering that the number of elderly citizens increased by 2.5
times during that period, it was unavoidable.
The second-largest growth was in bond expenditure, whichaccompanies the increase in the balance of government bonds. The¥11.66 trillion of fiscal 1989 doubled to ¥23.30 trillion in fiscal 2018.
There was no major change to other expenditures aside fromsocial security expenditure and national bond expenditure. There has
been small growth in defense expenditure (¥3.92 trillion to ¥5.19
trillion) and science and technology expenditure (¥448 billion to¥1.32 trillion), but other expenditures such as public works (¥6.20
trillion to ¥5.98 trillion), ODA, and education have gone down.
Expenditures in the 30 years of Heisei have increased by ¥37
trillion from ¥60.41 trillion to ¥97.71 trillion, but the majority of theincrease can be attributed to the increase in social security by ¥22
trillion and in national bonds by ¥12 trillion.
(3) There are limits to reductions in expenditure and an increase
in revenues is required
In contrast, tax revenues increased by only ¥8 trillion from ¥51.1
trillion to ¥59.79 trillion. Thus, the size of bond issuance has
increased by five times from ¥6.64 trillion to ¥33.69 trillion, and theratio of bond dependency expanded from 10.1% to 34.5%.
The balance of government bonds has expanded from ¥161
trillion, or 39% of nominal GDP, to ¥833 trillion, 158% of GDP. Social
security expenditure, an expenditure which inevitably expands withan aging population, increased by ¥22 trillion in the 30 years of
Heisei, but if tax revenues only increased by ¥8 trillion, how can thefiscal deficit be resolved? “Tax hikes for much needed social
security” is an issue which has thus far been considered taboo, but
we must face this issue.
In addition, social security expenditures such as medical care,
pensions, nursing care and livelihood protection must be covered
privately for the most part if they are not covered through publicmeans. These are also expenditures that all of us are likely to makeduring our lifetime. If that is the case, why can they not be collected
as taxes? Even if collected from the people, such expenditures do goback to the people, and there is a need to expand tax revenues andrestore “a mechanism where everyone supports everyone”. The
entire tax system must be considered to determine which tax items
to increase – not just the consumption tax, but also income tax,
corporate tax, asset tax, inheritance tax, etc.

3. Decreasing birth rate and aging population
CHART 2

Trends in expenditure items inJapan’s budget
Public works,

Fiscal 1989
education,¥60.4 trillion defense and others¥24.4 trillion+¥37.3 trillion

Fiscal 2018¥97.7 trillion

Local
allocation
tax grants¥13.4 trillion

SocialNational bonds
security
expenditure¥10.9 trillion ¥11.7 trillion+¥1.5 trillion+¥2.1 trillion

Public works,
education,
defense and others¥25.9 trillion

Local allocation
tax grants¥15.5 trillion

Note: Initial budget basis

Source: Compiled by the author+¥22.1 trillion

Social security¥33.0 trillion+¥11.6 trillion

National bonds
expenditure¥23.3 trillion

The issue around population is more about changes in the
structure of the population rather than the decrease in total number.
In other words, the number of citizens older than 65 years of age will
increase, but the productive-age population between ages 15 and 64
and juvenile population under 14 will decline.
Some often say that a decreasing population is nothing to worry
about because the Japanese population in 1948 after World War II
was 80 million; but since the population in 1967 during the period ofhigh economic growth was 100 million, Japan is only going back to
its recent past. However, although the number of 100 million is thesame, the structure of the population by age group is completely
different. For the 100 million in 1967, those under 14 years of age
were 24.4%, those aged 15 to 64 totaled 69%, and those over 65
were 6.6%. But in 2052 when the population will be about 100
Japan SPOTLIGHT • July / August 20195

COVER STORY 1

million, those under 14 will be 10.5%, those 15 to 64 will be 51.6%,
and those over 65 will be 37.9%, and the productive population of
10.4 persons supporting one elderly citizen in 1967, will become
only 1.4 persons supporting one elderly citizen in 2052.
Hence, while measures against the decreasing birth rate are
required in social security reform in an effort to increase the future
productive population as much as possible, at the same time workstyle reforms will also become more important to enable the current
productive age population and younger elderly citizens to work totheir full extent.

4. Satisfactory consumption and revitalization of the economy
About 60% of Japan’s GDP is personal consumption, and torevitalize the economy substantial consumption is vital. Social
security reform can contribute to this in two respects.
First, as often said, at the root of today’s low consumption in
Japan is the fact that the younger and mature generations are opting
to prioritize savings rather than consumption due to their vague fears
about the future, and allaying their concerns through social security
reform will have a great impact on consumption.
Second, in a society where elderly citizens are increasing, social
security sectors such as medical care and nursing care have thepotential to become a large core of a growing industry. According toeconomic census, the sales value of the medical and nursing
industry in 2015 was ¥111 trillion, higher than the ¥108 trillion in theconstruction industry and about 30% of the ¥396 trillion in the
manufacturing industry. Room for market expansion is extensivewith new technologies such as IT, new drugs and medical equipment
which utilize advances in medical science, new medical treatment
systems, and so forth. It is an area in which two birds can be killedwith one stone, with revitalization of the economy also contributing
to the promotion of people’s health.

5. Maintaining local communities
The social security system greatly impacts local communities. The
decreasing birth rate and aging society directly hit local
communities, especially small-scale municipalities. People who are
considering relocating from large metropolitan areas to regional
areas are said to focus on three points: employment opportunities,
educational institutions for children, and medical facilities.
Employment opportunities in regional areas used to be in the
manufacturing and construction industries, besides agricultural,
forestry or fisheries. But as previously mentioned, sales in the
medical welfare industry now exceed those of the constructionindustry. As society in Japan continues to face a decreasing
population, this viewpoint must be emphasized in order to maintainregional communities when undertaking social security system
reform.

Need for Long-term Vision
1. Unresolved fears about the future
As stated above, in thinking about the future of the social security
system, social welfare must not be considered in isolation, but the
6 Japan SPOTLIGHT • July / August 2019

inter-dependent relationships between other important issues suchas finance, economy, and regional society need to be fully taken into
account. In other words, consideration from a comprehensive andsystematic viewpoint and a long-term vision is necessary.
A long-term vision is also necessary for a more fundamental
reason. Of all the fears about the future that prevail in Japan today,the biggest is that the population will decline as the decreasing birthrate and aging society continue. Various projections, including
private ones, have been presented on the population decline and its
effects, but the government has yet to indicate any comprehensive
measures or policies to address this.
However, even though various forecasts and recommendations
focusing on the decreasing population have been presented, ourfears and anxieties about the future cannot be resolved that easily.
For one thing, many recommendations remain forecasts andsolutions to specific areas, and so there is no clear holistic view on
how to address a society with a decreasing population.
Second, although estimations on the impact of the population
decline have become more detailed, the recommended measures are
not well-developed, and thus doubts remain about their effect. It is
not clear where the financial resources will be raised, and that raises
questions about feasibility.
Third, although these are long-term forecasts, possible
catastrophic natural disasters, such as earthquakes, have hardly
been considered.
To address these fears of the Japanese people, once forecasts
have been obtained based on a long-term perspective of 30 to 50
years, it is vital to formulate a long-term vision which covers various
sectors such as social security, economy and infrastructure .

2. Reviving economic plans and national land plans cannot
address the issue
Then there are those who suggest reviving long-term economic
plans as represented by the “National Income Doubling Plan” or“Comprehensive National Development Plan” which indicate longterm national land maintenance, but these cannot address the issue.
Population is a given in economic planning and land planning, andalthough it is an important pre-condition when formulating policies,
it does not fluctuate with policies. In order to address the current
challenge that Japan is facing, policies need to change with the
population itself, such as total population and age composition. In
addition, the policy targets of economic planning and land planning
are in tangible areas such as hard infrastructure development andmacro-economic areas such as macro-economic indicators for theentire nation, but in an era of decreasing population “people”
themselves become soft and the micro-aspects are the policy
targets.
Japan, which has the world’s most rapidly declining population,needs to formulate comprehensive forecasts of the impact of thedecreasing population on various sectors and on the entire country.
At the same time, it needs to systematically formulate measures thatare consistent with these forecasts. Since impacts of catastrophic
disasters largely consist of uncertain factors, these can be inserted
as multiple scenarios during the formulation process.

COVER STORY 1

This system of comprehensive estimates and measures can be
described as a national grand design to address a decreasing
population society, or a national strategy, but since it is a policy
system based on highly accurate estimates of future population, theterm “long-term vision” must be used.
For the methodology of long-term vision formulation, there is aneed to collect the views of both the public and the private sectors,
rather than just have the government engage in a centralized
formulation process. Formulation entities should not only include awide range of private sector actors such as academics, businesses,
journalists, and NPOs, but also private think-tanks, and universities
and graduate schools of policy science. From the government also,
in addition to policy departments, policy institutions of each ministry
will also participate. If it is meaningful to have a national discussion
about a decreasing population society, then it will be important tospend considerable time, such as three years, to conduct
discussions.
Since it is the most crucial issue facing the nation, it should beformulated under the responsibility of the Cabinet. To be more
specific, permanent services that span the long term, such as
formulation, promotion, follow-up and revision – a permanent
institution, not a time-bound secretariat – should be put in charge.
For example, this could be conducted under the Council on
Economic and Fiscal Policy. As the legal authority, this council will
also be able to address issues beyond the important matters of
economic and financial policies, and address issues outside
economics.
In addition, once the long-term vision has been formulated, inorder to promote systematic policy accurately and effectively, apermanent institution will be essential. What will be useful references
are two examples by the Cabinet Office taking responsibility for
conducting not only formulation but also implementation of a policy
system. These are the “Committee for Promoting the Integrated
Economic and Fiscal Reforms” under the Council on Economic andFiscal Policy and the “Council for Promotion Regulatory Reform”.
For example, the Economic and Fiscal Reform Promotion
Committee is in charge of formulating detailed working plans forreform for each sector in order to ensure the economic and fiscal
revitalization action program is implemented as indicated in the“Basic Policy”, monitor the progress of the working plan, assessintermediate indices, and when not achieved, investigate the cause.

3. System for long-term vision (Chart 3):
A system for a long-term vision will be formulated based on future
population estimates for the entire country, by individual prefecturesand by municipalities for the next 50 years, and it will be based on
the National Census conducted every five years. In addition, future
estimates will be conducted for all sectors that population has an
impact on. When doing so, it is imperative that the estimates showinterdependent relationships between each sector and that they are
consistent. Estimates can have width and there can be multiple
estimates. The following five are considered to be the main sectors.

CHART 3

Relationship of the 5 sectors
necessary for long-term vision
Social life

Local society(pension, medical care,nursing care, child care,housing)(local communities,
local transportation,
local industries,
water and sewage)

SupportEconomy(household consumption,
corporate management,
industries, employment,
education, import-export,
finance)

LargestCatastrophic
hindrance
disasterfactorSocial infrastructure(main transportation,international transportation,communication
infrastructure)

Source: Compiled by the author

i. “social life” (pensions, medical care, nursing care, child care,housing)ii. “local society” (local communities, local transportation, local
industries, water and sewage)iii. “economy” (household consumption, corporate management,
industries, employment, education, import-export, finance)
iv. “social infrastructure” (main transportation, internationaltransportation, communication infrastructure)v. “disaster prevention” (personal damage, material damage,economic damage, capital function damage)The relationship between these five sectors will be based on theeconomy and social infrastructure, and support social life and local
society, while disaster prevention is the largest hindrance to theother four sectors. “Social life” roughly corresponds to the social
security sector.
Required financial resources (tax, national bonds, etc.) will be
provided depending on the nature of the various policies. For
example, policies that address the wide general public will besourced from the consumption tax, while policies related to regional
areas will be from local taxes, and policies related to increased
income will come from income tax or corporate tax.
The important aspect is to conduct follow-up studies on the statusof progress every year. A rolling method, which makes the necessary
revisions based on a Detailed National Census conducted every 10
years, is being considered. In addition, if a long-term vision based ona prefectural basis or municipality basis is formulated in light of thenational long-term vision, then a distinctive outlook reflecting thevarious regional characteristics can be drawn up. By formulating along-term vision and sharing it with the nation, a society which is led
by fear can turn course.
Mamoru Maekawa was vice-minister for policy coordination at the Cabinet
Office from July 2017 to July 2018. He joined the Economic Planning Agency in
1982, and has since then been in charge of macroeconomic policy andeconomic research.

Japan SPOTLIGHT • July / August 20197