The Journal The Authority on Global Business in Japan

“Reform of the social security system to one that is oriented to all generations is the greatest challenge of the Abe Cabinet, which promotes the dynamic engagement of all citizens. In light of the rapidly declining birthrate and aging society, it is vital that we do not stop at just improving the social security system, but proceed with reforming the system itself.”

These are the words of Japanese Prime Minister Shinzo Abe, delivered on September 20 at the government’s first planning meeting on the creation of a social security system oriented to all generations.

The meeting followed an uproar in June caused by the release of a report by the Financial Services Agency (FSA) that said the average couple living to age 95 would need an additional ¥20 million ($186,000) beyond what they would receive from the public pension system. Minister of Finance Taro Aso rejected the findings and that report was withdrawn in response to the outcry.

But the problem is real. Japan’s current pension and health­care systems will become more difficult to maintain as the population ages. The September meeting showed that the government understands this despite the walk-back.

Challenges
When the current system was designed, the expectation was that people would live into their seventies, perhaps eighties. Japan’s current life expectancy is 83.7 years—the world’s second highest—and is expected to reach 85.7 by 2030. But while that may be the average, more people are living beyond 100, and some projections show more than half of Japanese babies born today will pass the century mark.

At the same time, the number of babies born each year has been in decline for a decade. In 2018, there were 921,000 births in Japan, down by 20,000 from 2017. The number was below one million for the third year in a row and represents the fewest births since the record-keeping began in 1899.

The population may be shrinking, but the gap between those paying into the pension system and those withdrawing money is widening. In 2017, the country’s population was 126 million. A drop of 25 percent—to 94 million—is expected by 2060. That would widen what is already the highest old-age dependency ratio among countries in the Organisation for Economic Co-operation and Development (OECD).

The ratio of individuals aged 65 and over to those aged 15–64 stands at 46 percent—more than 10 points higher than the next OECD country (Italy, 35.2)—and could reach 77 percent by 2050, according to demographic projections.

A solution to this growing imbalance must be found if Japan is to maintain its high living standards.

“Fundamentally, Japan now stands at a very important crossroads in addressing the sustainability of health and retire­ment,” said John W. Carlson, manager of government affairs at AbbVie and chair of the American Chamber of Commerce in Japan (ACCJ) Healthcare Committee. “Overcoming the challenges facing the social security system will necessitate three key actions: the education and empowerment of Japanese citizens; expansion of public and private financing; and wider utilization of disruptive technologies to improve system efficiency.”

Solutions
Abe’s comments at the meeting established a framework for the government’s efforts.

“We aim to ensure the peace of mind of not only the elderly, but also children, the childrearing generation, and the current generation,” he said. “We will further review sustainable reforms on the entire spectrum of our social security system, such as pensions, healthcare, nursing care, and employment, with sights set on the arrival of the 100-year life society, amidst the declining birthrate and aging society, as well as the diversification of lifestyles.”

Areas being looked at include:

  • Early education
  • Higher education
  • Healthcare
  • Consumption tax
  • Workstyle reform

The last point relates to another of Abe’s goals: raising the retirement age.

At a May 15 panel on future investment, the prime minister said that employment laws would be changed to require companies to hire workers up to age 70. He continued this theme in his comments at the September meeting.

“We must create an envi­ronment in which healthy and highly motivated elderly people can work, regardless of their age. We have announced a series of initiatives, such as the establishment of a legal framework to secure employment opportunities up to the age of 70, and the creation of an environment that allows motivated people to have side jobs and multiple jobs.”

This will require a real shift in thinking for a society that does not embrace the concept of multiple jobs and in which the mandatory retirement age remains 60. While there are incentives for postponing retirement until age 65—and workers can choose to begin drawing their pension at any time between 60 and 70—doing so requires the cooperation of the company.

In terms of education, school became free for children aged 3–5 in October and, in April, higher education will become free for those who show that they are truly unable to pay.

Healthier Tomorrow

The viability of the healthcare system is also of great concern, and Japan faces a challenge brought on in part by demographic changes and in part by the success of its high-quality care and coverage.

One of the five pillars on which the ACCJ focuses its advo­cacy efforts is healthcare and retirement.

In 2017, the ACCJ Healthcare Committee released a white paper with the European Business Council in Japan that outlines recommendations for successfully navigating the social and economic changes that impact the health of the nation. And in 2018, the Healthcare Committee and the chamber’s financial services committees kicked off the Sustainable Health & Retirement Initiative, to develop a multiple-stakeholder, proactive blueprint for the future sustainability of Japan’s social security system.

Some 320 members comprise the Healthcare Committee, which has five subcommittees:

  • Dietary Supplements
  • Digital Health
  • Medical Devices & Diagnostics
  • Pharmaceuticals
  • Regenerative Medicines & Biosciences

Through its advocacy efforts, all these groups seek to improve understanding of how inno­vative medicines and tech­nologies can contribute to the Government of Japan’s vision for greater workforce productivity and economic growth.

Because solving the healthcare and retirement puzzle requires not just medical know-how but also monetary action, the leaders of the ACCJ Healthcare Committee and Financial Services Forum have increased collaboration to bring toge­ther the healthcare and financial services sectors in an ongoing dialogue.

Carlson explained, “From our perspective, it is critical that the public and private sector work together more transparently to develop solutions that meet the needs of the Japanese people and place Japan at the forefront of thought leadership on social care policy for aging societies.”

As Abe’s comments demonstrate, the Japanese government recognizes the need for a variety of policy approaches—including improving the fiscal sustainability of the social security system, and fostering a more dynamic society with higher productivity and more women and seniors in the workforce.

When it comes to health, the money put into the system should be viewed as an investment. Strengthening preventive nursing care and disease prevention have been cited by Abe as the goals of upcoming government initiatives. And finding more efficient ways to deliver healthcare will help keep costs manageable.

In its white paper, the ACCJ expressed great optimism that Japan is up to the task. “More than most nations, Japan is well-placed to meet these challenges: healthy life expectancy in Japan—the period when people can live without sustained medical or nursing care assistance—is 71 years on average for men and 74 for women,” the authors said.

“With the right policies and approach to healthcare, Japan can continue to improve the health of its citizens and create a blueprint that aging societies across the world can follow.”

Paying for It All

Recognizing challenges and crafting solutions is good, but somehow it must be paid for. The consumption tax increase from eight percent to 10 percent on October 1 has not been popular with consumers, and some have concerns about how it might negatively impact the economy due to reduced consumer spending.

If Japan is to avoid any part of the tax increase, it will need to transfer some of the burden onto the private sector.

But for the private sector to be able to deal with the additional burden, it will need to change its savings mindset into an invest­ment mindset, so increasing tax deferred investing—such as defined contribution plans and net income stabilization, or NISA, accounts—need to be expanded. Investment products need to become more transparent and investor-focused and investor education needs to be pushed.

But even with such a shift in investment strategy, the con­sumption tax may play a key role in saving Japan’s healthcare and social security systems. The International Monetary Fund (IMF) published a report on November 28, entitled On Financing Retirement, Health, and Long-term Care in Japan. Financing the cost of aging through consumption tax is one of the paths explored.

Assuming that the ratio of debt to gross domestic product (GDP) stabilizes at current levels, the authors considered what level of consumption tax would be needed to care for the population as it ages—if consumption tax was the only source of funding. Starting at eight percent, they found that a gradual increase to about 20 percent would be required.

Although the increases should be implemented very gradually, they say, half of the adjustment must be made by 2030. At that point, 11 years from now, the consumption tax rate would be 14 percent. In April, the OECD said that Japan may need to raise its consumption tax to as high as 26 percent to ensure fiscal sustainability—a rate that could be hard to swallow when a rise to just 10 percent is causing a stir. The OECD average is 19 percent. As with the IMF assessment, the OECD view assumes that consumption tax alone would be the source of primary surplus.

In the same report, the OECD recommends two other steps that the Abe administration is already working on: eliminating the mandatory retirement age of 60 and creating a more welcoming and supportive environment for women in the workplace.

So, while rises in the consumption tax may not go over well with the public, periodic increases may be a necessary part of life for a country that last year had public debt that was 236 percent of GDP.

But one thing that Japan has proven is that it is resilient. With the engagement being seen among business leaders, and the government’s willingness to consider new paths and engage in meaningful dialogue with the private sector, the country is likely to succeed in adapting to life as a super-aged nation, building a society that works for all generations.

 

Christopher Bryan Jones is Editor-in-Chief of The ACCJ Journal. Originally from Birmingham, Alabama, he has lived in Japan since 1997.
It is critical that the public and private sector work together more transparently to develop solutions that meet the needs of the Japanese people.