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.