TY - JOUR
T1 - Fiscal cost of demographic transition in Japan
AU - Kitao, Sagiri
N1 - Funding Information:
I would like to thank Takero Doi, Selahattin Imrohoroglu, Keiichiro Kobayashi, Tomoaki Yamada and participants at the RIETI seminar for valuable comments. I am grateful for the financial support of the Murata Science Foundation and support and hospitality of the RIETI while I was a visiting fellow. All errors are mine.
Publisher Copyright:
© 2015 Elsevier B.V.
PY - 2015/5/1
Y1 - 2015/5/1
N2 - This paper quantifies the fiscal cost of demographic transition that Japan is projected to experience over the next several decades, in a life-cycle model with endogenous saving, consumption, and labor supply in both intensive and extensive margins. Retirement waves of baby-boom generations, combined with a rise in longevity and low fertility rates, raise the old-age dependency ratio to 85% by 2050, the highest among major developed countries, and generate a significant budget imbalance, as the government faces rising costs of public pension and health and long-term care insurance. Preserving the current level of the transfers will require a major increase in taxation. Using consumption taxes to balance the government budget, the tax rate reaches the maximal value of 48% in late 2070s. A pension reform to reduce benefits by 20% results in a peak tax rate of 37%, which can be reduced further to 28% if the retirement age is also gradually raised by 5 years.
AB - This paper quantifies the fiscal cost of demographic transition that Japan is projected to experience over the next several decades, in a life-cycle model with endogenous saving, consumption, and labor supply in both intensive and extensive margins. Retirement waves of baby-boom generations, combined with a rise in longevity and low fertility rates, raise the old-age dependency ratio to 85% by 2050, the highest among major developed countries, and generate a significant budget imbalance, as the government faces rising costs of public pension and health and long-term care insurance. Preserving the current level of the transfers will require a major increase in taxation. Using consumption taxes to balance the government budget, the tax rate reaches the maximal value of 48% in late 2070s. A pension reform to reduce benefits by 20% results in a peak tax rate of 37%, which can be reduced further to 28% if the retirement age is also gradually raised by 5 years.
KW - Demographic transition
KW - Health insurance
KW - Japanese economy
KW - Long-term care insurance
KW - Public pension program
KW - Social security reform
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U2 - 10.1016/j.jedc.2015.02.015
DO - 10.1016/j.jedc.2015.02.015
M3 - Article
AN - SCOPUS:84928164432
VL - 54
SP - 37
EP - 58
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
ER -