Fiscal cost of demographic transition in Japan

Sagiri Kitao

Research output: Contribution to journalArticle

22 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)37-58
Number of pages22
JournalJournal of Economic Dynamics and Control
Volume54
DOIs
Publication statusPublished - 2015 May 1

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Keywords

  • Demographic transition
  • Health insurance
  • Japanese economy
  • Long-term care insurance
  • Public pension program
  • Social security reform

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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