The Social Security Crisis in Japan

Shunsuke Watanabe, Ph.D.
(Transcript of a speech delivered on March 11, 1997, at a gathering organized by the Consulate General of Japan in Boston.)

Good afternoon ladies and gentlemen. My name is Shunsuke Watanabe. It's my pleasure to be here. I am an editorial writer for the Nihon Keizai Shimbun--one of Japan's leading newspaper companies. The newspaper focuses on economic news; it is like the Wall Street Journal of Japan. Our daily circulation is 3 million.

You may think that an editorial writer for such a leading newspaper would speak English very well. But this is not so in my case. I am not so good at English. So I will speak to you today from a prepared text.

I will accept questions after my presentation. And I will answer in Japanese as my interpreter will help me answer them. I will answer any question about recent trends in the social security system and other aspects of Japan. I will try to answer them to the best of my knowledge.

People in Japan feel that America does not understand them. For instance, do you know who is Japan's prime minister? Do you know? If you don't know, don't worry. Not even the Japanese can keep up; we have had eight prime ministers in the last eight years. Japan's productivity may be getting lower now, but Japan has a high productivity of prime ministers. I hope, though, that you will know Japan a little better after my address today.

I will talk to you for about 30 minutes about how Japanese society has changed in these 20 or 30 years and what changes can be expected in the near future. I will explain the changes in the social security system that have taken place with these changes.

Burden Rate of 37%

First, I would like you to look at some numbers. Please look at Table 1 on the handout. This shows the total amount that was spent on social security in Japan in fiscal 1994. (By the way, the fiscal year in Japan runs from April to March the following year.) The total figure is about 60 trillion yen, or around 500 billion dollars. In per capita terms it comes to 480,000 yen, or around 4,000 dollars. All the figures I use are rounded numbers.

The figure has been growing by about 6% annually. So in fiscal 1995, the total should have reached 63 trillion yen, or nearly 560 billion dollars, and in fiscal 1996, it is expected to be around 67 trillion yen, or nearly 560 billion dollars. Today, I will be using the fiscal 1994 figures, as they are the latest available statistics.

How was the 60 trillion yen spent? Slightly more than half, or 51%, went to public pensions. And 38% was spend on the public health insurance system.

So pensions and medical expenses alone account for 89% of social security spending. The remaining 11% went to providing all other types of social security, including care for the elderly, welfare for people with disabilities, welfare services for children, and unemployment insurance. You can see that pensions and medical expenses dominate social security spending. Please look at Table 2.

Let us now see where the 60 trillion yen came from. Of course, it came from the taxes and premiums paid by the general public. The government collects taxes and premiums from incomes of people and enterprises. Japan's national income for fiscal 1994 was roughly 16% of this figure.

In other words, the Japanese public paid 16% of their income to keep the social security system going. And of course, social security is not the only thing the government -- both national and local -- asks the public to finance. The public must also pay for the country's diplomatic services and defense; for new roads and railways; for public education, and to keep government employees on the payroll. The list goes on.

These expenses must be financed with tax money. And in fiscal 1994, 78 trillion yen was collected for these non-social-security services. This was 21% of national income. So, the burden of taxes and social security on the Japanese people was 37% of their income--16% for social security and 21% for other public services. This percentage is commonly called the "national burden rate" in Japan. Therefore, individuals and enterprises have 63% of their income at their disposal.

Graying of Society

These numbers I have just given you are being watched very closely in Japan. Prime Minister Ryutaro Hashimoto has said his top priority will be reforms in five areas. One area is administrative reform, and another is fiscal reform. A third is the reform of the social security system. It is said that unless social security is structurally reformed, the Japanese economy will collapse.

This is because the share of elderly people in the Japanese population is rising very quickly. And the birthrate is falling. Many industrial countries have had this experience, but none has seen their population age so fast in such a short span of time as Japan.

The share of those 65 and over reached 7% of the population in 1970. It exceeded 14% just 24 years later, in 1994. Most Western countries took at least 50 years to see the share double from 7% to 14%; in the case of Sweden, it took 120 years. This shows how quickly the Japanese society is graying.

Now, please look at Table 3. The number of elderly people will continue growing by an average of at least 600,000 a year through 2025. That means there will be more than 36 million elderly people by then. We in Japan have traditionally looked up to old age, and I may be scolded for treating it as a problem. But if we don't act quickly, there will be a crisis.

For one thing, pensions must be paid to elderly people. And because elderly people need greater medical care than younger people, their growing numbers mean higher medical bills for the nation as a whole. Under the present health insurance system, patients do not pay the entire bill. Most of the costs are paid with taxes and health insurance premiums.

If the number of younger people who pay the taxes and premiums were also rising, we wouldn't have to worry. But like other industrial countries, Japan has a declining birthrate.

In 1950 women gave birth to an average of 3.65 children during their lifetime. That means every married couple in Japan had nearly five children on average. These figures were unusually high, however, because Japan was in the middle of a postwar baby boom at that time. Please look at Table 4.

In 1957 this figure fell to 2.04, and it stayed between 2.0 and 2.2 through 1974. In 1975, however, it dropped to 1.91, and it has been falling ever since. In 1996, last year, this figure was 1.42. Among industrial countries, only Germany and Italy have lower rates than Japan.

One big reason for the drop is the changing lifestyles of Japanese women. More women now attend college, and most go to work after graduation. The age differential between males and females is narrower, and more women reject the idea that marriage is a woman's road to happiness.

I may say that to many young Japanese women, young Japanese men seem less attractive. They seem to be losing their basic social skills. They cannot speak in front of others, for example. Some must even ask their mothers how they should behave on a date. As a result, young women have become disenchanted with young men. Over the past 15 years the share of women in their twenties and early thirties who are choosing to stay single has risen sharply. And many more couples are getting divorced. In 1995, the number of divorces exceeded 200,000 for the first time.

During the baby boom shortly after World War II, there were 2.7 million births annually. Today, the figure is less than 1.2 million. Because there are fewer births, services for young children have been losing their business, and some private kindergartens and elementary schools have been forced to close. The number of medical school students who want to become pediatricians has dropped significantly. The shrinking of the younger population will make the growing taxation and social security burden that much heavier.

Ballooning Social Security Costs

The government says that social security expenses, which is now 16% of national income, will rise to 30% by 2025. When combined with spending for other public services, the total burden will be equivalent to 60%. The figure today is 37%, as I mentioned earlier. If the burden rises to 60%, individuals and companies will be able to spend only 40% of their income. If this happens, the private sector will lose its vitality, and the people will probably complain.

The government in recent years has been saying that the national burden rate will rise somewhat over the next several decades. But they assert that it should not be allowed to go higher than 50%. In keeping with this policy, Prime Minister Hashimoto has adopted a goal of keeping the rate under 45%.

Even if social security payments increase, they will not be a heavy burden if the economy also grows. For instance, a 6% growth in social security spending can be offset if national income also grows by 6%.

Unfortunately, such a rosy scenario is unlikely. The most optimistic economists in Japan say the economy will grow by around 2%. Another cause for pessimism is Japan's growing fiscal deficit. The national and local governments have debts totalling more than 450 trillion yen. This is around 4 trillion dollars. To clear this debt, taxes will have to be raised, and Prime Minister Hashimoto's goal of 45% will be impossible to keep.

A key solution is to restructure the social security system. Administrative reform and fiscal reform will also be important, and government workers will have to be reduced. The prime minister has promised to implement the reforms even if he becomes a "ball of flames." Perhaps he should have a sprinkler system. Ideally, of course, I hope he can implement the reforms without catching on fire.

He will have to cut social security spending as a whole. But there are some fields of services that must be expanded. For example, more money must be spent to care for elderly people who are bedridden or senile.

Nursing expenditures constitute part of the 11% of social security expenses other than pensions or medical costs. In the past, this small share was sufficient. But it is too small as the number of elderly people who need care has increased. About 1 in every 10 elderly people now requires such care. In many opinion polls, people say they are worried about the prospect of having to care for an aging parent or spouse at home. Many new nursing homes will need to be built to allay such fears, and more health workers will have to be trained to look after elderly people who remain at home.

Painful Reforms

The cost of caring for elderly people had been low for two reasons. First, because they were not very numerous until recently and, second, because there were many family members who lived with them to look after them.

In 1953 the average household had 5 members. By 1994 the figure had dropped to 2.95. This is due to the nuclearization of the Japanese family. Aged parents usually lived with their children in the past, but now the number of elderly people living with children are decreasing, as indicated in Table 5 . And it will become the responsibility of society at large to look after them.

One ambitious project the government is implementing will raise the number of care facilities and health workers over the 10-year-period between fiscal 1990 and 1999. It has earmarked 9 trillion yen, or about 75 billion dollars, for this purpose. Moreover, nursing services will have a new source of funding; a system of care insurance is expected to be implemented from 2000.

As the cost of caring for elderly people increases, the financial burden on the public at large will also increase. Therefore, social security expenses in other areas must be lowered. And the cuts must come from both pensions and medical expenses.

As a first step, the health insurance system will be revised during fiscal 1997, this year. The biggest change is that people who receive medical attention will pay a bigger portion of the bill. More reforms are being considered, and patients will no doubt be asked to pay for a growing share of medical costs.

Pensions will also have to be cut back. Three years ago, the nation's pension scheme was overhauled. Because of this, people who are in their forties or younger will not get their pensions until 65, instead of 60 as at present. Also, pension payments will be smaller than the average of 220,000 yen (about 1,800 dollars) a month people receive today. The pension scheme will be further reformed two years from now, in fiscal 1999.

These steps may be painful, but without them Japan's public finances will collapse. And prospects of growing old in Japan will become a worrying ordeal.

The graying of the population will have a negative impact on economic activity. Policies will have to be adopted to allow older people to continue working. And regulations will have to be eased to encourage the development of new industries.

It will also be important to use money for social security more efficiently. For example, we might use pensions to pay the medical expenses of bedridden elderly people, instead of using health insurance as at present.

I have just outlined the major changes facing Japanese society today and how the system of social security must be reformed to adapt to these changes. Now, I would like to answer any questions you may have. Thank you very much for your attention.

Question and Answer Session

Q:There has been talk in the United States of investing the social security fund in stocks for the first time. Is this being discussed in Japan?
A:I understand that in the US, aging is not as severe as in Japan. But in 20 years, the US will probably face a big crisis. In the US, one government discussion is as you mentioned in your question, and the other is to solely privatize US public pensions. In Japan, investing public money into private stocks is prohibited by the Ministry of Finance.

Q: This is also prohibited in the US, but there are still discussions on changing it. Is Japan having any such discussions?
A: As I mentioned in my speech, in two years the Japanese social security system will be reformed. Japan is thinking about privatizing the Japanese pension system, which would indirectly mean putting public money into private stocks.

Q: Can you elaborate more clearly on ideas of reforms being discussed to take place in Japan in 1999?
A:The Japanese government will officially disclose this discussion maybe this fall or by the end of this year. So I can only discuss my personal understanding, which is that the Japanese government should reduce its spending for pensions. One possibility is privatizing pensions, and another possibility is to reduce the amount that each person receives. Two types of pension systems for the private sector and the public sector are the basic plan and the system that is prorated by income. The plan is that the prorated portion be privatized, but that portion is currently assisted by the Japanese government. Japanese and American insurance companies and trust/banking companies are looking into the privatization of the Japanese pension because it is an area where their business can get in.

Q:At what age do Japanese citizens now receive their pension?
A: Now the age is 60, but by the 1994 reforms it's shifting toward an older age, like the US. For example, a man born before April 1, 1941 is eligible to receive his pension at 60, but a man born after April 2, 1941 will receive his pension at 61. It is gradually shifting until finally those born in 1949 and later will receive their pensions at age 65.

Q:Isn't that an unrealistically low age? Even the US wants to raise the pension age higher than 65, and the US has a lower lifespan than Japan.
A:One reason is that the Japanese retirement age is only at 60 now. From the OECD countries, only Japan, France, and Turkey have this retirement age.

Q:Is there a differentiation on receiving money for males and females in Japan?
A:Women will receive their pensions at the age of 60 even when men's retirement age increases. But the amount of money they receive is different. The amount is decided by the income and length of employment and women do not work as long or earn as much as men. So, the amount women receive is less.

Q:Is pension received considered taxable income?
A:If a person has an income other than a pension, then the income and pension will be taxed together as a whole. But pensions for widows are excluded from tax.

Q:In the US, many young people do not believe that social security will be there for them when they are old. Do the young people in Japan have the same feeling?
A:I read an article in the March 1995 issue of Time magazine about a survey. People aged 18 to 34 were surveyed. Of that group, 46% believe in UFOs, but only 28% believe there will be pension money for them when they retire. I think there is the same feeling in Japan.

Q: In the US, there are many books on pension reform, and specifically in Boston. Are you planning on writing a book on the Japanese situation? And if you do write a book, can you have it translated into English for me?
A:I have written two books already and am currently working on one regarding the 1999 reforms. I'll be happy to send you one, but I can't promise any English translation.

(The above article is offered for reference purposes and does not necessarily represent the policy or views of the Japanese Government)

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