Intergenerational Implications of Fiscal Consolidation in Japan
IMF Working Papers, August 1, 2012
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Bibliographic details
- Authors: Kiichi Tokuoka
- Published: August 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475505474.001
Summary
- In Japan, intergenerational inequality in lifetime resources is substantial, with a heavier fiscal burden on the young than the old.
- Given the need for fiscal consolidation, intergenerational inequality is worse than existing policy would suggest.
- Lack of fiscal consolidation would eventually increase interest rates, reduce output, and hit young generations harder.
- Simulations using an overlapping generations model indicate that fiscal consolidation packages combining social security spending reforms and revenue measures are desirable from the perspective of intergenerational fairness.
- Delaying fiscal consolidation could be costly and worsen intergenerational resource inequality.
Key findings
- Intergenerational inequality: fiscal burden is shifted more heavily onto younger cohorts compared with older cohorts.
- Fiscal consolidation composition: including both social security spending reforms and revenue measures improves intergenerational fairness.
- Timing: postponing fiscal consolidation increases costs and exacerbates intergenerational inequality.
- Macroeconomic consequence of inaction: higher interest rates and lower output would disproportionately affect young generations.
Simulations and methodological notes
- Model used: overlapping generations (OLG) model / OLG simulation.
- Metrics referenced: lifetime resources, net burden, present discounted value, pension replacement ratio.
- Policy instruments analyzed: social security (pension) spending reforms, VAT increase and other revenue measures.
Policy implications and recommendations
- Combine social security spending reforms with revenue measures in fiscal consolidation packages to improve intergenerational fairness.
- Avoid delaying fiscal consolidation because delay can be costly and worsen intergenerational resource inequality.
- Consider the long-run macroeconomic effects of failing to consolidate (higher interest rates and lower output) which would harm younger cohorts.