By 2050, almost 1/3 of the Japanese population will be composed of individuals over the age of 65. While this will certainly affect Japanese old-age pension schemes, it will also lead to large increases in the Japanese government’s outlay’s for health and long-term care costs. Fukui and Iwamoto (2006) estimate the size of this increase in government implicit liability for medical spending spending in their paper titled “Policy options for financing the future health and long-term care costs in Japan.”
The Japanese Ministry of Health Labor and Welfare had already published the Shakai-hoshou no Kyufu to Futan no Tiooshi (Perspectives on the Benefits and Burdens of the Social Security System) and the Kaigo Sahbisuryou tou no Mitooshi (Projection of Demand for Long-term Care). According to these reports, health care costs will increase from 7.1% of national income in 2004 to 11.2% of national income by 2025. If we include long term care costs, these numbers increase to 8.5% in 2004 and 14.8% in 2025. The authors claim that these reports may be overly optimistic and also wish to extrapolate the estimations to a longer time horizon.
The authors estimates are simply derived. Health care costs are assumed to be constant (as a percentage of national income) for each age grouping and the total cost is just a function of the predicted demographic changes in each age category. While it is unlikely for costs to be constant for each age group–due to Baumol’s cost disease–it is not possible for health care costs to continually increase ad infinitum as a percentage of national income or else the costs will eventually overtake a society’s total wealth. The authors use the government demographic projections, but assume 2004 labor force participation rates for each age-sex group (as opposed to the Japanese government estimates which assume increased Labor Force Participation). A novel approach the authors use is to include the fact that the government often subsidizes providers to reduce the price. Increased medical spending will also increase the size of the government subsidies.
The authors claim that if the current pay-as-you-go system is kept in place, the total burden on future generations will increase by 63% in real terms by 2100. Even under more optimistic assumptions, the increase in the total burden place on future generations will be 34%. While I place little faith in the overall accuracy of these figures, they do show that if current demographic projections are correct, Japan is facing a serious fiscal crunch in the future.
Fukui, Iwamoto (2006); “Policy Options for Financing the Future Health and Long-Term Care Costs in Japan,” NBER Working Paper, No. 12427.