Population Aging, Health Care, and Fiscal Policy Reform: The Challenges for Japan

DOIhttp://doi.org/10.1111/sjoe.12280
Date01 April 2019
AuthorMinchung Hsu,Tomoaki Yamada
Published date01 April 2019
Scand. J. of Economics 121(2), 547–577, 2019
DOI: 10.1111/sjoe.12280
Population Aging, Health Care, and Fiscal
Policy Reform: The Challenges for Japan*
Minchung Hsu
National Graduate Institute for Policy Studies (GRIPS), Tokyo 106-8677, Japan
minchunghsu@grips.ac.jp
TomoakiYamada
Meiji University,Tokyo 101-8301, Japan
tyamada@meiji.ac.jp
Abstract
Weconstr uct a transition analysisbased on a general equilibrium life-cycle model to investigate
the effects of aging, and we evaluate variouspolicy alter natives designed to lessen the negative
influence of aging. In particular, we analyzerefor ms of insurance benefits and tax financing tools
that were recently the focus of a great amount of attention and debate in Japan because of the
tense financial situation there. Weshow that although the potential reforms improve the welfare
of future generations, the political implementation of such reforms is difficult because of the
large welfare costs for the current population. Our analysis suggests that a gradual reform with
an intergenerational redistribution will be more politically implementable than an immediate
reform.
Keywords: Japan;population aging; universal health insurance
JEL classification:E21; H51; I10
I. Introduction
In this paper, we aim to provide a quantitative analysis of the influence
of population aging on the cost of maintaining a universal health care
system. We focus on Japan because it has a public universal health insurance
(UHI) system that provides health insurance coverage to all residents, as in
most Organisation for Economic Co-operation and Development (OECD)
countries, and because its population has been aging dramatically over
the past two decades. We study the tax burden associated with financing
the UHI system and its effect on the economy as the population ages.
*This study is a part of the “Fiscal and Social Security Policyunder a Low Birth Rate and Aging
Demographics” project undertaken at RIETI. T. Yamada was financially supported by the Japan
Society for the Promotion of Science (JSPS) Grant Number 22330090. M. Hsu is grateful for the
support from the GRIPS Policy Research Center,Nomura Foundation, and JSPS Grant Numbers
20467062 and 16KK0052.
C
The editors of The Scandinavian Journal of Economics 2017.
548 Aging, health care, and fiscal reform
1980 1990 2000 2010 2020 2030 2040 2050
Year
0
10
20
30
40
50
60
70
80
Fraction of population (%)
0-14
15-64
65+
1980 1990 2000 2010 2020 2030 2040 2050
Year
10
20
30
40
50
60
70
80
90
100
Dependency ratio (%)
Total dependency ratio
Elderly dependency ratio
(b) Dependency ratios
(a) Population structure
Fig. 1. Demography in Japan 1980–2050 [Colour figure can be viewed at
wileyonlinelibrary.com]
Potential reforms of the UHI system and its financing mechanisms will
also be evaluated. Although Japan specifically is studied, the implications
of the impacts of aging and policy reforms apply to most OECD countries
with public UHI systems, and to those emerging economies that are
establishing their UHI systems and are expecting rapid population aging
(e.g., Brazil, China, Mexico, and Thailand), as these countries might face
similar challenges in the near future.
The current cost of health care in Japan is not high (approximately
10 percent of GDP during 2011–2014) compared with the United States
and European countries. In addition, the Japanese have among the highest
life expectancy and lowest infant mortality rates in the world. The health
care system in Japan appears to be in remarkably good shape. However,
as the population ages, the low cost of the Japanese health care system
is unlikely to be sustainable, given its current framework and financing
methods. Japan already has the world’s oldest population, and it is projected
that 40 percent of Japanese citizens will be 65 or older by 2050 (see
Figure 1(a)).
The aging of the population affects the health care system through two
channels. First, as the fraction of the population over 65 increases, the
fraction of individuals who pay taxes and premiums that finance the system
decreases. In particular, under the current system in 2012, 38.6 percent of
the program’s costs are financed by general government revenues, and 48.8
percent are paid by a premium (a payroll tax) that is levied on employers
and workers. Out-of-pocket co-payments contribute only approximately 11.9
percent of total medical costs. It is clear that the burden of financing health
care falls primarily on the working-age population (age 15–64), which is
C
The editors of The Scandinavian Journal of Economics 2017.

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