Tax and Social Security Burden

The estimate of the future tax and social security burden as percentage of national income simulated by regression (1) suggests that the ratio of social security benefits in national income will be more than 30%. This estimate is supported by other methods of estimation (government estimate in 1997 and Maruo, 1996). The burden of tax and social security contributions as a percentage ratio of national income will increase from about 37% in 1995 to more than 50% as Chart 27 shows (Maruo, 1992 and 1996).

Some economists warn that the Japanese economy will fall into the so-called "Welfare State Disease" and that social security funds will go bankrupt in the 2020s when the ageing process reaches a plateau. However, econometric analysis (Maruo, 1996) suggests that if steady economic growth and full employment are maintained, tax (including social security contributions) increases will not cause a decrease in the take-home pay (after tax income) of working households.

Chart 28, based on the assumption that the average income in real terms of working households increases at 1.5% per annum shows that the disposable income of the average working household will steadily, even if population aging proceeds and the tax burden increases.

Figures in Chart 28 are estimated assuming that the average rate of wage increase is 1.5 percent per annum. Equations in note 6 show that if the rate of change in before-tax income is larger than the rate of change in after tax income increases. Chart 10 suggests that the after tax income per month that was ¥474,000 in 1992 will increase to ¥647,000 (about $60,000) in 2025 at 1993 prices.

If steady growth is maintained and if we assume, for simplicity, that social security and social services are financed by the pay-as-you go principle, and benefit recipients are separated from taxpayers, the following conclusions will be deduced.
a) As long as after tax income increases, then the disposable income of the present working generation will increase and, therefore, the disposable income will be larger than that of the present generation;
(This condition will be maintained, if d y / y + d r / r > 0 (note8)).
b) As the pension benefits are indexed with the disposable income of workers, the present social security benefits will increase as after tax wage increase.
As ageing proceeds, the tax burden on the present working generation will increase. Still a) and b) suggest that the disposable income of the present working generation, that of the future working generation, social security benefits of the present retired generation and that of the future retired generation will be better.

This conclusion is somewhat different from Professor L. Kotlicof's which has an important influence on the discussion of inter-generational equity . He maintains that the future generation will receive far fewer social security benefits than what they have paid for. If a high-time discount rate is assumed, his conclusion may be correct. However, this does not means that the inter-generational distribution is unfavorable to the younger generation. Professor Kotolikoff's comparison, shown by equation (a), is one of the criteria to judge the equity of generational distribution, while the criterion suggested in this paper, shown in equation (b), is an alternative means to judge inter-genaratonal equity.

Kotolikoff's Partial Criteria

p=b (1+g) / (1+i)--------------(a),
where p is payment for social security that the working generation pays and b is social security benefits that they receive after they retire, i is the time discount rate. Suffix 0 means the present generation and 1 means future generation.

Kotolikoff' assumes that if p is larger than b (1+g) / (1+i), the present working generation is not in an equitable situation.

Total and Dynamic Eriterion

However, according to the alternative criterion, if equation (b) holds, the future generation will be in a better economic situation. Then the future generation is not in a worse situation than that of the present generation.
if y*₁y*_o (1+ dy / y)ⁿ / (1+ dr / r)ⁿ _o -------------------------(b),
When generational account is introduced, the effects of the unfavourable modification of seniority wage profile for older workers must be taken into account.

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