Raise the Pension benefit age

Japan’s current pension system needs to be reformed to make it more sustainable as Japan’s population continues to age: “Its life expectancy has increased over time to 83 years which is the highest in the world today.” Japan’s population ageing and low fertility rates are working in conjunction to raise the nation’s old-age dependency ratio, which is the ration of how many retirement age people there are to how participants in the labor force.  Japan’s uses a pay-as-you-go pension system that is putting a higher burden on today’s working generation because the have to support a higher ratio of retirees. The old-age dependency ratio “is expected to rise from 38 percent in 2010 to 57 percent in 2030.”

One way to constrain pension spending is to raise the pension benefit age to 67 years from the current 65. Raising the benefits age would decrease the number of years that retirees are drawing from the system and increase the number of years that they are contributing to the system. In general, there are 3 ways to reduce the burden of the pension system on the government: increase benefit age, decrease pension benefit, or increase pension taxes. Realistically, the solution will likely have to combine aspects of all three of these solutions, but raising the benefit age is particularly desirable because it helps balance the inter-generational costs of pension benefits such that the costs don’t fall disproportionately on the shoulders of the young.

The current benefit age is being raised to 65 and should be fully implemented by 2030. Further increases in the benefit age would create significant fiscal savings, and bring Japan in line with the retirement age of other advanced economies. Japan should be able to push its retirement age farther based on its high old-age dependency ratio and life expectancy, but its history of lower retirement benefit ages makes it politically difficult to reform the system.

One of the potential fiscal benefits of increasing the retirement ages is that it could fund a “reduction in payroll taxes” that could lead to more consumption and/or investment.

Based on the IMF 2012 Article IV report and background studies.

2 thoughts on “Raise the Pension benefit age

  1. savas

    I agree with idea of increasing the age to receive pension benefits in Japan. With advancement in diet and medicine, the global life expectancy is increasing. However, the retirement age has not moved with the life expectancy rate. This causes a financial burden on the government and current workers to support the retirees. If the retirement age is raised, I think that Japan will be economically better off because federal costs will decrease and there will be more workers, which can lead to GDP growth. I think the most important part of raising the retirement age is that it will cause lower federal costs. With the aging population and low fertility rates, the Japanese government will need to increase its already high deficit to support these benefits. I believe this idea of raising the age to receive benefits should not only occur in Japan, but also many other countries including the United States. Due to the baby boom, the United States will have a similar experience as Japan.

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  2. wilburns

    The effect of rising life expectancies is especially acute in Japan, where the life expectancy for men is now 80.57 yrs., for women its a staggering 87 yrs. paying pension and retirement benefits for over 20 years can be an insanely expensive proposition, so the money saved by raising the age combined with the money gained in terms of production by the increase in workers can be quite substantial. This could also alleviate the burden the government is facing in attracting immigrants, as the country will need fewer immigrants if more people are working.

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