On Financing Retirement, Health, and Long-term Care in Japan

IMF Working Papers, November 28, 2018

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On Financing Retirement, Health, and Long-term Care in Japan

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Bibliographic details

• Authors: Ellen R. McGrattan, Kazuaki Miyachi
• Published: November 28, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484384718.001

Summary

• Japan faces the problem of how to finance retirement, health, and long-term care expenditures as the population ages.
• The paper analyzes the impact of policy options using a dynamic general equilibrium overlapping generations model, specifically parameterized to match both the macroeconomic and microeconomic level data of Japan.
• Principal finding: financing the costs of aging through gradual increases in the consumption tax rate delivers a better macroeconomic performance and higher welfare for most individuals than other financing options considered.

Methodology

• Model: dynamic general equilibrium overlapping generations model.
• Calibration: parameterized to match both macroeconomic and microeconomic level data of Japan.
• Policy scenarios analyzed (as described in the summary):
  • Gradual increases in the consumption tax rate.
  • Raising social security contributions.
  • Debt financing.
  • Uniform increase in health and long-term care copayments.

Key Findings

• Gradual increases in the consumption tax rate:
  • Deliver a better macroeconomic performance than the alternatives analyzed.
  • Deliver higher welfare for most individuals relative to alternatives.
• Other financing options analyzed include:
  • Raising social security contributions.
  • Debt financing.
  • A uniform increase in health and long-term care copayments.
• The model-based comparison indicates the consumption-tax path is superior on macroeconomic and welfare metrics for most individuals (as summarized in the paper).

Policy Implications and Recommendations

• Preference for financing aging-related expenditures via gradual consumption tax increases over:
  • Raising social security contributions.
  • Relying on debt financing.
  • Uniformly increasing copayments for health and long-term care.
• Implicit recommendation: adopt consumption-tax-based financing to mitigate negative macroeconomic impacts and improve welfare outcomes for most individuals.

Content in this bundle

• On Financing Retirement, Health, and Long-term Care in Japan, WP/18/249, November 2018
  • On Financing Retirement, Health, and Long-term Care in Japan, WP/18/249, November 2018 (Markdown version)
  • On Financing Retirement, Health, and Long-term Care in Japan, WP/18/249, November 2018 (PDF)