Introduction

In the 1950s and 1960s, the Japanese economy grew at around 10% per annum in real terms. Thanks to the high rate of economic growth, the per capita GDP of Japan caught up with those of other OECD countries at the beginning of the 1970s. Remarkable development of social security in Japan began in 1973, which was called "the first year of welfare." The social security expenditure, including social services, such as medial care services and personal social services (note1), began to expand rapidly. The proportion of social security benefits to national income increased from 7% in 1970 to 16.4% in 1994.

One of the reasons for the fast development of social security can partly be explained by the nation's economic success. When economic welfare became substantially satisfied, Japanese people became aware of the relative backwardness in social security and the quality of life. The national goal then transformed from economic growth to improving welfare and the quality of life. "Dammed-GNP" and "Post GNP Era" - catch phrases at the beginning of the 1970s - symbolized the change of Japanese national goal.

Beyond Conventional Welfare State: Toward Optimum Welfare Mix

Another factor that has helped develop the social security in Japan was the fast aging of the population. The proportion of the elderly (65 years old and over) to the total population is estimated to increase from 7.04% in 1970 to 15.4% in 1997. It is estimated to increase to 18% in 2005 and 28% in 2030 according to the latest government estimate. As the ratio of social security costs increases as the elderly ratio (the proportion of the elderly to the total population) increases, at least in Japan, it is estimated that the future costs of social security will become large if Japan follows the Scandinavian model of welfare state that depends too much on the government and public sector. If Japan follows the Scandinavian model, the tax ratio, including social security contributions, will become too high, for the elderly ratio in future Japan is estimated to be much higher than that of present-day Sweden. This is one of the reasons why Japan cannot follow the Scandinavian model of a welfare state, though Japan has learned much and will continue to learn from the experiences of the Scandinavian welfare state. Welfare mix (Richard Rose & Rei Shiratori eds., 1986, Maruo, 1984) or a welfare pluralism that tries to share the role of welfare supply and costs by the government sector, market sector and informal sector will be required to moderate the excess burden of tax and social security contributions in the future.

Productive Welfare

Another feature of Japan's welfare policy is the productive aspect of social security. Social security is usually considered a burden in terms of economic efficiency and economic growth. However, social security policy contributes to economic growth, too. In a demand-short economy, the expenditure of social security will encourage economic growth and employment. On the supply side, the encouragement of employment of older people and the disabled will contribute to increase GDP and tax revenue (including social security contributions) on the one hand and save social security expenditure on the other. The same is true of Japan's family policy that supports working women with children. Besides, adequate policies for the elderly will be helpful to promote what is called "productive aging" (Dr. Robert N. Butler). It is necessary to moderate the increase in the "welfare dependent ratio" (the proportion of those who receive social security benefits to those who pay the costs through tax and social security contributions) by encouraging increases in the workforce participation ratio and enlarging the tax base on the one hand, and by decreasing the number of those who have to depend on social security benefits on the other.

Sustainable Welfare Policy

As population aging is progressing very fast, it is sometimes argued that social security funds will go bankrupt in future. However, econometric analyses show that if appropriate policies are introduced and steady economic growth is maintained along with full employment, the after tax income in real terms will improve steadily and social security in Japan can be sustained. Japanese model of welfare mix, productive welfare and sustainable welfare are the key phrases for the future Japanese model of welfare state.

Market-Oriented Welfare Policy and its Prerequisites

Fourth, social security will become more market-oriented. This is favorable in terms of efficiency improvement. However, market-oriented politics sometimes increase inequality in income and assets. One measure to cope with the inequality problem is a provision of a social security safety net. Another way is a positive asset distribution policy. Important effects of asset growth and fluctuations in economic stability and distribution must be taken into account. The effects are especially large in Japan, where the total value of national assets is nearly 20 times as large as the national income and 26 times of total employees compensation. This means that the capital gain from a 1% increase in asset prices is the equivalent of 26% of a wage increase.

A combination of Keynesian demand management and income distribution by tax and social security benefits in a conventional welfare state in the second half of the 20th century will partly be replaced by a combination of asset demand management and asset distribution policy in the 21st century.

---

Back to Index