COVER STORY • Exploring for the Best Models of an Aging Society – Lessons from Japanese Experience • 3

N

ew Philosophy of Social Security& Direction of Reform – “Housing”
as a Pillar of Social Security

By Kazumasa Oguro

Introduction
Japan currently faces a variety of problems, but looking 10 to 30
years into the future, the most serious economic problems can be
attributed to three major environmental changes: a contracting
population (including a low birthrate and aging population); low
growth; and increased poverty. If Japan’s economic strength
declines, the underpinnings of the country’s diplomacy and national
security could be shaken as well. What is serious about the threeproblems of a contracting population, low growth, and increased
poverty is that various “foundations” of Japanese society andpeople’s daily lives, which people have come to rely on as sources ofincome and benefits, could be shaken at both the macro (e.g.
national, local, corporate) and micro (e.g. household) levels.
Unlike during times of rapid population growth, the uniform, rigid“Japanese economic system” (e.g. the social security system andtaxes, governing structures including the relationship between
national and local governments) has today become unable toaddress these problems efficiently, and this is causing various
problems at the individual level, including in terms of daily lives andemployment.
For example, in rural areas where population decline is increasing
the number of abandoned houses, people are becoming more
attracted to cities, creating a greater likelihood of infrastructure
decay and accelerated population outflow. While low growth means
intensified competition among companies on the one hand, theJapanese employment system – characterized by lifetime
employment and age-based salaries – is being shaken, and thefunction of social safety nets is declining. The makeup of families isdiversifying as the number of single-person households of older andunmarried people increases, and as the support function of families
declines, isolation is increasing. As functions carried out by
communities, families, and companies weaken and various risks
become more complex, weak individuals are being overwhelmed bycomplex and complicated risks that conventional social security is
unable to address. As low growth widens inequality, insufficientsocial security functions lead to increased poverty.

Failure of Social Security to Function
The failure of social security to function is particularly intense.
Conventional social security has been based on “self-help”, with
12 Japan SPOTLIGHT • July / August 2019

Author Kazumasa Oguro“cooperative help” (social security) in place to provide against risks
in daily life that can be dispersed using logarithms (e.g. theuncertainty of life, risks of illness and nursing care). Cooperative
help supports self-help, and cases of poverty or other circumstancesthat cannot be addressed through self-help and cooperative help are
addressed through supplementary “public assistance” (e.g. welfare).
This basic philosophy envisions the typical risks people face directlyin their lives and builds a framework of cooperative help and public
assistance to address them, but it is already becoming clear that thisexisting system may be reaching its limits.
One sign of this can be seen in public finances. Currently, the total
debt outstanding for the national and local governments combined(as a percentage of GDP) is more than 200%, meaning that Japan’s
public finances are in an extremely unique situation historicallyspeaking. Since 1989, roughly 70% of the aggregate increase in
outstanding debt has come from increases in social security-related
expenses and decreases in tax revenue, and if the supplementary
portion of tax revenue distributed to local governments from thegeneral account is included, this percentage rises to roughly 80%.
The fact that social security reform will be at the core of fiscal
reconstruction cannot be overstated, but what will the trend forsocial security expenses look like going forward? At its meeting on
May 21, 2018, the government’s Council on Economic and Fiscal
Policy announced the “Future Outlook for the Social Security System
Towards 2040” (the “Forecast of Benefits and Costs”), compiled
jointly by the Cabinet Secretariat, the Cabinet Office, the Ministry of
Finance, and the Ministry of Health, Labour and Welfare, as a basis
for a “national” discussion of social security reform from a mediumto long-term perspective (Chart 1).
This theoretical calculation shows the Forecast of Benefits andCosts for social security including pensions, medical care, andnursing care, and estimates them (as a percentage of GDP) fromfiscal 2018 through fiscal 2040, and is equivalent to the Revised
Future Projection of Costs Required for Social Security released by
the Ministry of Health, Labour and Welfare roughly six years ago (inMarch 2012). The previous calculation covered the period from fiscal
2012 to fiscal 2025, and this time it has been expanded to extend to
fiscal 2040.
What, then, is the meaning of the new calculation? In a word, itshows the extremely severe shape of social security. But first, before
going into that explanation, let us confirm in simple terms thecalculation’s premises. The population figures used in the calculation
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COVER STORY 3

that by fiscal 2040 the consumption tax rate willneed to be raised to 22% from 10%.
(vs GDP; baseline case)
The Ministry of Finance’s “Long-Term Estimates(trillion ¥)of Japan’s Public Finances (Revised Edition)” (April
188.5～190.3 188.2～190.0(23.8～24.1%) (23.8～24.0%)
6, 2018) also serves as reference. This estimate
Difference
9.4 (1.2%) 9.4 (1.2%)
between13.1 (1.7%) 13.1 (1.7%)
plan basis andwas first released in April 2014 as a draft fromcurrent projections
140.4～140.8 140.2～140.6
24.6 (3.1%) 25.8 (3.3%)
policy proposal members of the Fiscal Policy(21.7～21.8%) (21.7～21.8%)
Nursing care:+¥1.2 trillion
121.3
7.7 (1.2%) 7.7 (1.2%)
OthersCouncil’s Fiscal System Subcommittee, and(+0.2%pt)(21.5%)
10.0 (1.5%) 10.0 (1.5%)①:68.3 ①:66.7
Medical care:Children/Child care 6.7 (1.2%)(2.3%)
revisions to the long-term estimates were released
14.6
15.3 (2.4%)(8.6%)(8.4%)① -¥1.6 trillion
7.9 (1.4%)②:70.1 ②:68.5② -¥1.6 trillion(1.9%)①:48.7 ①:47.8
in October 2015 and April 2018. The April 2018
Nursing care 10.7(-0.2%pt)(8.9%)(8.7%)(7.5%)(7.4%)
39.2②:48.3 ②:47.4
estimate puts the cost of medical and nursing care
Medical care (7.0%)(7.5%)(7.3%)at roughly 9% of GDP in around fiscal 2020, andrising to roughly 14% by around fiscal 2060 (Chart
73.2
73.2
56.7
59.9
59.9
(9.3%)(9.3%)
Pensions
2). A roughly five percentage-point increase in the(10.1%)(9.3%)(9.3%)
combined cost of medical and nursing care over 40(current projections) (plan basis)(current projections) (plan basis)years means a roughly 2.5% increase over the 20
Fiscal 2018
Fiscal 2025
Fiscal 2040
<GDP ¥564.3 trillion><GDP ¥645.6 trillion><GDP ¥790.6 trillion>
years from fiscal 2020 to fiscal 2040, which is
Source: Extracts from the “Future Outlook for the Social Security System Towards 2040”, submitted by the Ministry of
consistent with the Cabinet Office’s current
Health, Labour and Welfare to the Council on Economic and Fiscal Policy on May 21, 2018calculation. If the Ministry of Finance’s long-term
are from the National Institute of Population and Social Security
estimate is appropriate, the cost of social security benefits (as aResearch’s Population Projection for Japan (2017 projection). In
percentage of GDP) would rise by an additional 2.5% points fromaddition, the assumptions for nominal GDP growth rates and pricefiscal 2040 to fiscal 2060.
increase rates are based on the Cabinet Office’s Economic and Fiscal
This suggests that an additional consumption tax rate increase of
Projections for Medium- to Long-Term Analysis (January 2018
roughly five percentage points will be needed. Given the risk ofedition) for the period to fiscal 2027, and on the public pension 2014
increased interest costs on debt, and assuming that social security is
Actuarial Evaluation for fiscal 2028 and beyond.
not drastically reformed, this means that the stabilization of public
For example, the growth scenario uses a nominal GDP growth ratefinances is ultimately likely to require a consumption tax rate ofof 3.5% for fiscal 2027, and 1.6% for fiscal 2028 and beyond, whileroughly 30%. The OECD’s Economic Survey of Japan, released in
the rates in the baseline scenario are 1.7% for fiscal 2027 and 1.2%
mid-April 2019, also sounded a warning with regard to thefor fiscal 2028 and beyond. Nevertheless, the average nominal GDP
contracting population and Japan’s economy, and emphasized thegrowth rate for the roughly 20 years from fiscal 1995 to fiscal 2016
need for a consumption tax rate hike of up to 26% to stabilize
was only 0.3%. There is no problem when growth rates surpass
Japan’s public finances, which is generally consistent with the 30%
forecasts, but is there really no risk in considering reform based on
figure for the consumption tax rate.
an assumption that nominal GDP growth rates going forward will
Need for a “New Philosophy of Social Security”
rise by more than four times above this level?
Using the above assumptions, even under the baseline scenario,
As shown above, the system’s fiscal limitations are clear, but
the main point of the calculation (Forecast of Benefits and Costs) is
public finances are not what is really important. A seriousthat the cost of social security benefits (pensions, medical care,examination of how to rebuild social security is needed. Against anursing care, etc.) is 21.5% of fiscal 2018 GDP, and this rises to a
backdrop of obvious fiscal limitations and rural decline, themaximum of 24% for fiscal 2040. In other words, the cost of social
maintenance of the purpose and role of social security requires asecurity benefits (as a percentage of GDP) will rise by 2.5 percentage
new approach that goes beyond the system’s rigid assignment ofpoints over roughly 20 years. Given that current GDP is roughly
responsibilities that has existed to date.
¥550 trillion, this indicates that the cost of social security benefits
In that case, what is particularly important, for example, is thewill increase by roughly ¥14 trillion (¥550 trillion x 2.5%).
concept of “separating the ‘insurance’ (risk dispersal) function from
A one percentage-point increase in the consumption tax ratethe ‘tax’ (redistribution) function and focusing the distribution of(excluding the effect of any offsetting tax rate reductions) will
public expenditures on persons who are truly in need”. In othergenerate roughly ¥2.8 trillion, so if the consumption tax is to be used
words, the most important thing is to create a “new philosophy ofto address this increase in social security costs, the consumption tax
social security”.
rate would need to be raised by roughly five percentage points.
The cost of social security benefits today has ballooned to roughly
Furthermore, in addition to the current fiscal deficit, taking into
¥120 trillion, with the funds to cover social security coming fromaccount the need to reduce the fiscal deficit by roughly ¥20 trillion
insurance premiums (roughly ¥70 trillion), as well as sources
given that interest costs increase as deficits continue, it would mean
CHART 1

Projected costs of social security benefits

Japan SPOTLIGHT • July / August 201913

COVER STORY 3

CHART 2

Trend of “age-related outlays” focusing on medical & nursing careexpenditures<Trend of aging rates and “age-related outlays”>(vs GDP)40%(vs GDP)<Trend for each composite item>

38.13%

Public pensions

10%
35%

9.59%

Aging rates

28.88%

27.26%

5%

26.48%

25%

20%

Medical care

6.80%

30%

2020

(fiscal year)

2030

2040

2050

2060

4.95%
4.88%
3.73%
3.67%

Nursing care
Education, etc.

3.66%

Total “age-related outlays”

22.13%

9.71%
9.22%
8.87%
8.72%

2.07%
0%

(fiscal year)

2020

2030

2040

2050

2060

Source: Ministry of Finance (2018), “Long-Term Estimates of Japan’s Public Finances (Revised Edition)” (April 6, 2018)

including the national treasury (roughly ¥34 trillion), local
governments (roughly ¥13 trillion), and so on. Of these, in manycases the use of national and local government expenditures(national treasury and local governments’ share) can be seen as
inefficient from the perspective of redistribution.
For example, public expenditures (national treasury) account forhalf of the source of funds for basic pensions. Going forward, thenumber of poor older persons with low pensions is expected toincrease, but regardless of the size of these pension benefits, public
expenditures will pay for half of basic pensions. For example, it isunderstandable that for an older person receiving a pension of ¥1
million per year, public expenditures would account for half of thebasic pension, but it is difficult to understand why for an older
person receiving an annual pension of ¥3 million, it would beappropriate for public expenditures to cover half of that basic
pension. In other words, if there is a rapid increase in the number ofpoor older persons with low pensions, the amount of public
expenditures used for basic pensions for persons receiving highpensions should be reduced, and concentrated in payments for older
persons with low pensions (persons truly in need).

Housing Policies as Social Security
Furthermore, in Europe and the United States, “housing” is one
pillar of social security, but a similar argument exists in the field of
housing policy. As is well known, Japan’s population is set to shrink
rapidly over the next 100 years, and by around 2080 is expected tobe half of what it was in 2010. By region, the less population an area
has to start with, the faster the contraction is set to be. This is the
backdrop behind the rapid increase in the number of abandonedhouses.
According to the Ministry of Internal Affairs and Communications’
14 Japan SPOTLIGHT • July / August 2019

Housing and Land Survey, the number of abandoned houses
increased 1.8 times (to 8.20 million from 4.48 million) over the 20
years from 1993 to 2013. The percentage of abandoned houses in2013 was 13.5%, and a June 2015 report by the Nomura ResearchInstitute estimates that by 2033 this percentage will reach 30.2%.
Nevertheless, the total number of residential units in Japan in2013 was 60.63 million, which was 3.04 million (5.3%) more than in
2008. This clearly shows that there is already an oversupply of
housing inventory. Furthermore, the creation of supply relies onstrong demand for housing, and mortgages are what individuals relyon the most when purchasing a residence. According to the Bank ofJapan’s Flow of Funds statistics, the outstanding balance ofresidential mortgages in fiscal 2017 (extended to individuals byfinancial institutions) was approximately ¥200 trillion. Given the highprice of housing, few consumers purchase housing with a single
cash payment, and in most cases consumers use mortgages.
There are two types of housing – owned homes and rental housing– and in the postwar period housing policy has prioritized owned
homes, with an emphasis placed on support for housing purchased
through individuals’ own efforts. A mortgage tax reduction has beenat the core of policies to support residential purchases. Japan beganwith the “housing purchase deduction system” that ran for six years
from 1972, and the first time a mortgage-related tax deduction was
introduced in 1978.
Afterward, the content and names of the system changed manytimes, including the “housing purchase promotion tax”, and today
we have the “mortgage tax credit system”. Under this system, whena residence is purchased (or expanded) using a mortgage of 10 ormore years, income tax owed is partially reduced based on a set ofdefined rules.
The amount of the credit is limited to 1% of the year-end mortgage
outstanding, with a cap of ¥400,000. The total amount of tax revenue

COVER STORY 3

CHART 3Home ownership & rental housing
rates by household income
(%)
100
90
80
70
60
50
40
30

Owned home

Publicly managed
rental housing

Private rental housing

20
10

on
on
on
on
on
on r
on
on
an n ion
illi
illi
illi
illi
illi
illi ighe
illi
illi
th illio ill
m
m
m
m
m
m
m
m
m
s
h
s m 2
7
5
3
4
0
5
10
20 nd
Le ¥1 15423-2
-1
7a
15
10

Source: Ministry of Internal Affairs and Communications (2015), “2013 Housing and Land
Survey”

lost as a result of this system changes in line with revisions to thetax code every few years, but is generally within the range of ¥500
billion to ¥1 trillion annually. The mortgage tax reduction has been
expanded over time as needed, and currently has an upper limit of amortgage balance of ¥50 million (in the case of durable high-quality
housing, otherwise ¥40 million).
Given this, have we thought about which group – among low-,
medium-, and high-income individuals – benefits the most from the
mortgage tax reduction?
The answer is simple: it is the middle- and high-income groups
and not the low-income group. In the first place, low-income people
who have difficulty making ends meet do not have the resources topurchase something as expensive as a residence. In other words,
those who use the mortgage tax reduction the most are mediumand high-income individuals.
Chart 3 shows the rates of home ownership and rental housing byhousehold income, based on data from the Housing and Land
Survey. Home ownership among households with annual incomes ofless than ¥1 million is roughly 40%, but this rises to roughly 90%
for households earning ¥20 million a year or more.
Mortgage tax reduction policies reduce the total burden for
wealthy individuals who are able to purchase a residence, but this isfinanced by taxes and other payments from other people including
people with low incomes, raising the possibility that taxation
principles are unfair. Furthermore, revisions of the tax code in recent
years have seen a shift in emphasis for taxes paid to the central
government, from direct taxes (employment income tax, corporate
income tax) to indirect taxes (e.g. the consumption tax), and because
the shift to taxes like the consumption tax means an increased tax
burden for low-income people, that trend could become more
pronounced. We must also not forget that the portion of resources
for mortgage tax reductions that is covered by fiscal deficits is

placing a burden on future generations.
In addition, mortgage tax reductions have come to be emphasized
as counter cyclical economic measures by the central government.
The explanation for this is that newly constructed housing leads topurchases of furniture and other durable consumer goods, which inturn have various other economic effects, but mortgage tax
reductions are also linked to local taxes, so unlike general income tax
reductions, the inclusion of local tax in this inducement-type of tax
policy could represent a deviation from taxation principles.
Furthermore, a portion of mortgages is securitized through theJapan Housing Finance Agency, representing an implicit government
guarantee, and this raises the problem of major losses on mortgagebacked securities like those experienced by Ginnie Mae and Fannie
Mae in the US.
Given these issues, as a housing policy, this system of deduction
for mortgage interest has received much criticism for not functioning
in a way that helps people who need assistance the most, and thesystems were abolished in the United Kingdom in 2000, in Germany
in 1994, and in France in 1997. This can also be seen as “public
expenditures focusing on transfer payments to those who are truly inneed” as a “new philosophy of social security”.
In other words, this involves abolishing mortgage tax reductions,and using those savings to increase payments like “housing
allowances” to households with incomes below a certain level, fromthe perspective of making fair and efficient use of limited resources.
A housing allowance guarantees a minimum level of housing
standards for families in accordance with their need, and while inEurope there is a basis for some programs to guarantee a minimum
standard of living, unlike child allowances, these are not well known
in Japan.
It is often pointed out that poor older persons fall into “residential
poverty”, and as the trend of declining birthrate and aging population
accelerates, Japan is likely to see a large increase in the number ofthese poor older persons. By my own calculation, roughly 1 million
people aged 65 or older today are poor older persons receiving
public assistance, and this could more than double to surpass 2
million by 2048, and climb further to 2.15 million by 2065. With its
contracting population and sharp rise in the number of “abandonedhouses”, the time has come not only for Japan to rebuild a new
philosophy of social security, review mortgage tax reductions, andexpand housing allowances, but also to begin to consider housing
policies that pay benefits with physical goods, including making
effective use of abandoned houses.

Kazumasa Oguro is a professor of the Faculty of Economics at Hosei
University and consulting fellow at the Research Institute of Economy, Trade &Industry at METI.

Japan SPOTLIGHT • July / August 201915