Financing the Social Securityin Japan
Takashi Unayama(Hitotsubashi University)

Features of the Social Security System in Japan• Social insurance scheme– Financially independent from government’s general accounts– Each program has their own fund managed by the government• No private insurance company is involved– Benefits depend on contributions• Unlike tax based system in which benefits are independent from tax payment, thegovernment makes a contract with a participants• Programs are different according to its purpose and coverage– Public pension for employees/non-employees– Health insurance for employees/non-employees– Long-time-care for age under 65/age 65 and over• Universal– All Japanese residents must enroll• Pay-as-you-go (PAYG) financing– Most of benefits paid now is financed with contributions paid now• Future benefits are partially funded– The government subsidizes them (from the general account).

PAYG Finance System

Social Security
Premium

Social Security
Premium

Social Insurances(Special Accounts)

The Younger
Benefits

Benefits
Co-Payments

The Elderly

PAYG and the Aging
Old-Age Dependency Ratio
1980 = 13.2

2000 = 24.9

Total Amount of Benefits¥24.8 tri. (￡165 bil.)2015 = 42.7

¥78.1 tri. (￡522 bil.)¥119 tri. (￡800 bil.)

PAYG Finance System and Government debt

Government(General Account)

Tax

Social Security
Premium

Social Security
Premium

Social Insurances(Special Accounts)

The Younger
Benefits

Tax?

Benefits
Co-Payments

The Elderly

Reforms Before Abenomics• 2004 Public Pension reform– Increasing public pension premium (gradually until 2017)– Increasing the subsidy from the general account– Introducing the “Macroeconomic Slide” system• Comprehensive Reform of Social Security and Tax (2012)– To simultaneously achieve two priority goals• Enhancement and stabilization of social security• Fiscal consolidation– As for the revenue side:• Consumption Tax rate Increase from 5 to 10 percent• Increase of the highest marginal individual income tax rate
• Strengthened enforcement of Inheritance Tax• Public pension “cut”

PROs and CONs of “Reform” options
Consumption Income SocialTaxTax
Security
Premium

Benefit Cut Copayment

Size of impacts〇

PossiblyDo the elderly pay?

〇〇

Do the richer paymore? (progressivity)〇△Action

8% → 10%(Postponed untilOct, 2019)

Possible?
〇

PossiblyNot so Bad for theeconomy?
Politically easy?

DebtFinance2004 PublicPension
Reform wascompleted inSep, 2017

Extension of“macroeconomicslide” system〇〇△〇

Discussed
NOW

Reducing the
primary deficit
to 1 percent ofGDPFiscal Consolidation Policies in Abenomics• “Without economic revitalization, there can be no fiscalconsolidation” (経済再生なくして財政健全化なし)– Try to make up the deficit by “economic growth”– Achieving 2% inflation rate will mitigate the consolidation problem⇒ That is, they are trying to go without any serious “reform”• Avoid negative impacts of reforms on economic growth– The second Consumption Tax rate increase was postponed twice inNovember 2014 and June 2016 (and now planned in October2019)– Basic Pension cut for higher income earner, which is discussed
in the “Comprehensive” reform, has been canceledIs there any realistic scenario?
• It is not quite sure that 2% inflation can be achieved– Bank of Japan repeatedly extends the schedule for achieving their 2%target• Even if the target will be achieved, still knife edge scenario– Higher growth usually coincides with higher interest rate
– If interest rate increases more rapidly, government cannot pay• So far, the primary deficit will worsen in coming years– The Primay Balance-GDP ratio was projected as -1.7% at FY2018 but
now -2.9% according to the interim report for “Integrated Economicand Fiscal Reforms”– One important reason is unexpected slow growth in tax revenue– Not only because of postponing of Consumption Tax rate increase• Economists are more pessimistic about the situation