Demographic Impacts on Social Security System

and Fiscal Policy: Contexts in Japan

G20 Symposium

Junji Ueda

Ministry of Finance, Japan

January 17, 2018

0

• How can we cope with increasing demand and supply for healthcare services, while achieving better health outcomes, efficient service provision and fiscal sustainability?

• What would be possible measures for curbing healthcare spending, and financing increasing spending?

• How can we cope with uncertainties under demographic changes, while keeping social equity and fiscal sustainability?

• Can we attain a better combination of public/private pension, and a better design for public pension combining pay-as-you-go/funded systems?

Key questions for fiscal policy and social security

Income support for elderly people (Pension)

Healthcare

1

0 50 100 150

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150

0

10

20

30

40

50

60

70

80

90

100

1945

(year)

Demographic Change in Japan

2045 2017 1973

050100150

0

10

20

30

40

50

60

70

80

90

100

050100150

0

10

20

30

40

50

60

70

80

90

100

050100150

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150

0

10

20

30

40

50

60

70

80

90

100

050100150

0

10

20

30

40

50

60

70

80

90

100

20

65

age

Men Women Men Women Men Women Men Women

( ten thousand )

Fertility rate Aging rate (65 and over)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1950 55 60 65 70 75 80 85 90 95 2000 05 10 15 20 25 30 35 40

Projections(as of 1969)

Projections(as of 1986)

Projections(as of 2016)

Actual value

( % )

0

5

10

15

20

25

30

35

40

45

1970 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 45 50 55 60

Projections(as of 2016)

Actual value

Projections(as of 1975)

( % )

(year)

Uncertainties for demographic changes in Japan

2

(Source) MIC (1945-2017), NIPSSR (2045)

(Source) NIPSSR

-5

0

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Projections(as of 1973)

Projections(as of 1984) Projections(as of 2004)

Actual value

Wage ( % )

Yield on investment

(year)

-8

-6

-4

-2

0

2

4

6

8

10

12

2001 2005 2010 2013 2015 2020

Projections(as of 1994)

Projections(as of 1999) Projections(as of 2004)

Actual value

Uncertainties for macroeconomic variables in Japan

3

( % )

(Source) MHLW, 2016, “2014 Actuarial Valuation and Reform Options”

Uncertainties for public pension system

• Longevity • Fertility • Migration

Demographic changes

• Productivity (and long-term economic growth) • Capital-labor ratio (and interest rate, or return on assets) • Saving / investment balance

Macroeconomic variables

• Changes in relative size of different social groups, such as: employed/self-employed (formal/informal) urban/regional status of immigrants, etc. affecting coverage, eligibility, contribution history, and expected benefit level

Societal changes

4

Measures coping with demographic impacts on pension system

• Amending a future contribution rate

→ To assure balance between actuarial liabilities and future revenues under the currently revised projections for exogenous variables

• At the same time, negotiate for changing policy parameters, such as benefit accrual ratios, eligibility age, indexation rules, etc.

→ To avoid significant increases in the future contribution rate

Before 2004 reform : Regular 5-year actuarial review

‘Defined Benefit’ scheme with 5-year renegotiations and revisions

Affording some incentives for policymakers to :

• postpone raising contribution rate (assuming higher contribution rate in the future)

• make optimistic projections for exogenous variables to avoid both cutting benefits and increasing contribution

→ Uncertainties for future policies about benefit and contribution, and less credibility of public pension system

5

6 Measures coping with demographic impacts on public pension system

1. Fixing future contribution rates

• Gradually increasing the EPI contribution rate on wages from 13.58% (2004) to 18.3% (2017)

2. Automatic adjustment for benefit level

• Introducing a modified indexation rule reflecting demographic factors

→ To assure fiscal sustainability, the rule will be automatically applied for necessary periods, which will be described in regular 5-year actuarial valuations.

3. Increasing subsidies to basic pension (NP)

• Using additional revenue from consumption tax raised in 2014

After 2004 reform : Automatic balancing mechanism (ABM)

contribution

Res

erve

s

Nat

ion

al

sub

sid

ies

Amount of Pension

Fixed

6

Measures coping with demographic impacts on pension system

1. Expanding the mandatory coverage of EPI* • Including short-term workers [since 2017]

(working 20 hours in a week, earning 800 USD in a month, at companies with more than 500 employees)

→ To enhance old-age income support by public pension for short-term workers *EPI: Employees’ Pension Insurance, providing an earning-related pension on top of a basic

pension (both public, pay-as-you-go)

2. Expanding the role of private pension and saving • Introducing personal DC pension with tax allowance (iDeCo) [since 2001; expanded in

2017] • Expanding tax allowance for small saving by households (NISA) [since 2014]

→ To supplement smaller public pension by voluntary private saving

Other reforms for pension system

7

Measures coping with demographic impacts on pension system

Further reforms

1. More incentives for working longer • More flexibility for pushing back the starting age of receiving public pension

→ To allow working longer, and receiving more pension after the deferred starting age

2. More re-distributional functions of public pension • Need to reconsider pension benefit and tax on pension for high-income earners

→ To focus the role of public pension on preventing old-age poverty

3. More flexible adjustments of benefit level • Need to reconsider ‘nominal floor’ of pension benefit adjustment

→ To avoid intergenerational inequity

8

Objectives of a national healthcare system

Decent benefit coverage

with limited copayment

: assuring equal access by all

income level citizens to decent

healthcare services

Quality of

healthcare services

: better services by

competition and

technological progress

Limited fiscal burden

: not requiring excessive fiscal

resources (mandatory social

contribution and general tax) More redistribution for equity purpose

requires more fiscal resources

Asymmetric information between patients and providers results in inefficiency, such as supplier-

induced demand / increasing costs

Japan’s context: • Laissez-faire approach for

service delivery (dominated by private service providers, without gatekeeper functions)

• Strict price control to contain costs (using uniform fee schedule revised every 2 years at global and item-by-item level)

Japan’s context: • Increasing fiscal deficit 9

24.5

13.7

10.3

7.8

8.3

10.6

12.5

14.0

15.8

19.5

24.5

30.8

39.4

50.0

65.3

80.2

94.4

107.8

0.0 20.0 40.0 60.0 80.0 100.0 120.0

0～4

5～9

10～14

15～19

20～24

25～29

30～34

35～39

40～44

45～49

50～54

55～59

60～64

65～69

70～74

75～79

80～84

85～ Public Subsidy

349,000

0.4

3.3

7.0

15.6

36.4

75.0

131.9

202.0

0 50 100 150 200 250

40～64

65～69

70～74

75～79

80～84

85～89

90～94

95～

Health Care Spending per capita by Age Groups （CY2016）

Elder Care Spending per capita by Age Groups （CY2016）

(Source) MHLW, 2018, “Estimates of national medical care expenditure”, “Survey of long-term care benefit expenditures”

(JPY10,000) (JPY10,000)

Average

553,000Yen

Average

910,000Yen

Average

50,000Yen

Average

480,000Yen

（Age） (Age)

Public Subsidy

77,000

Approx.

5times

Approx.

1.6times

Public Subsidy

14,000Yen

Public Subsidy

136,000Yen

Approx.

10times

Average

184,000Yen Public Subsidy

26,000

Approx.

3times

Approx.

3times

Approx.

5times Approx.

13times

Average

4,000Yen Public Subsidy

1,000Yen

Challenges for healthcare system under demographic changes

Higher per capita healthcare spending by elderly people

• Higher ratio of elderly people results in higher healthcare spending in total.

10

-1.0

-3.16 -0.82

0.19 0.004 0.1

-1.31

1.7 1.6 1.9 1.3 1.5 1.2 1.3

1.6

1.0 1.2 1.1 1.0 0.9 0.9

0.2 1.2 1.3

1.8 1.5

1.5 2.2

2.1

2.1

0.4 1.1

0.7

2.9

0.0

1.9 1.8

3.2

0.0

3.0

2.0

3.4 3.9

3.1

1.6 2.2

1.9

3.8

-0.4

-4

-3

-2

-1

0

1

2

3

4

5

2003 04 05 06 07 08 09 10 11 12 13 14 15 16

Increases in medical care spending

Contribution of others, including technological progress Medical care

expenditure

Contribution of price changes Contribution of demographic changes

( % )

Challenges for healthcare system under demographic changes

( proportion of GDP, % ) ( proportion of GDP, % )

Medical care Long-term care

Projection of healthcare spending

( FY ) ( FY )

6.5

7.0

7.5

8.0

8.5

9.0

2018 20 25 40 601.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2018 20 25 40 60

Projection by Government [2018/5]

Projection by Fiscal System Council [2018 April]

Projection by Fiscal System Council [2018 April]

Projection by Government [2018/5]

11

(Source) MHLW, 2018, “Factor decomposition of national medical care expenditure”

(Source) Cabinet Secretariat et al., 2018, “Projections for social security 2040”; Fiscal System Council, 2018, “Long-term projections for Japan’s public finances”

Oncoming trilemma and reform options in Japan

Decent benefit coverage

with limited copayment

: assuring equal access by all

income level citizens to decent

healthcare services

Quality of

healthcare services

: better services by

competition and

technological progress

Limited fiscal burden

: not requiring excessive fiscal

resources (mandatory social

contribution and general tax)

• Enhance efficiency and productivity using data and technological progress, redesigning incentive structure, etc.

• Effective supply control mechanism regional supply plans by prefectures

• Rationalize copayment considering ability to pay (income/asset), not relying on age

• Review benefit coverage enhancing self-help for low-risk areas; reflecting effectiveness of medicine and treatment;

• Secure fiscal resource from tax and social contribution earmarking consumption tax revenue to social security spending; broadening base for social contribution;

• Preventive healthcare, enhancing better health

12

Measures coping with increasing healthcare service

Economic and Fiscal Revitalization Action Program (2015) : FY2016-2018

• Optimization of the healthcare and long-term care delivery systems [11 agenda]

• Incentive reform [8 agenda]

• Industrialization in public services [4 agenda]

• Reviewing burden and benefits [4 agenda]

• Reforms relating to the dispensing of drugs and compensation for drug costs [11 agenda] New Plan to Advance Economic and Fiscal Revitalization (2018) : FY2019-2021

• Promoting preventive medicine and better health [18 agenda]

• Reforming healthcare service provision [31 agenda]

• Reviewing benefit and burden [10 agenda]

Reform agenda and programs for curbing growth

13

Diversified outcomes and demand / supply across different regions (prefectures)

-90

-60

-30

0

30

60

90

120

（ten thousand）

◆ Regional difference of medical care expenditure per capita

( 47 prefectures)

Max：Fukuoka prefecture

＋104,000 Yen

Average for 47 prefecture ：537,000 Yen

Min：Niigata prefecture

-7,100 Yen

■：inpatient

■：outpatient + pharmacy

■：dentistry

18

22

26

30

34

600 1,100 1,600 2,100 2,600

number of hospital beds per one hundred thousand people

Impatient expenses per capita （ten thousand）

◆ Relationship between impatient expenses and number of

hospital beds (47 prefectures)

Measures coping with increasing healthcare service

• Enhance fiscal responsibility of local governments

→ Establishing a clear linkage between benefit and burden at local government level, while being supported by national subsidies

Long-term care system : municipalities

Medical care system : prefectures

→ Institutionalizing mandatory supply plans made by local governments

→ Visualizing different outcomes and effectiveness to motivate reforms

Strengthening the fiscal role of local governments

14

(Source) MHLW

Lessons learned from Japan’s experiences

• Installing flexible and automatic adjustments for benefit parameters

→ need to cope with realization of uncertainties without renegotiation / political decisions

• Effective control of demand and supply of services by fiscally responsible institutions

→ need to focus on and incentivize for better outcomes and efficiency

• Avoiding commitments based on optimistic assumptions and projections

Ex. free healthcare provision to people aged 70 and more adopted in Japan from 1973 to 83

For sustainable pension and healthcare systems

• ‘Output is central’ for assuring real benefit of social security system at national level

→ Need to carefully consider impacts of social security system on labor supply (elderly and female)

→ Need to effectively use retirement savings for long-term economic growth

→ Need to avoid significant economic distortions by further revenue mobilization

Need to assure sustainable growth under demographic changes

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