Aging in Japan Michael Smitka Washington and Lee

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Aging in Japan Michael Smitka Washington and Lee University October 2007 © Michael Smitka 2007

Context • Rapidly aging society – novel situation in known human history – declining population due to low fertility novel too • Japan in the vanguard – it begs to be studied • Important since Japan not unique – Similar issues will affect US, EU, China, Korea, parts of Southeast Asia, South Asia and Latin America by 2050 © Michael Smitka 2007 1

Summary • Fertility decline implies rapid aging – Such fertility decline is “normal” • It is primarily an economic, not a cultural issue • Savings is not how retirement is financed – Fallacy of composition: households save, economies can’t • Savings is fundamentally “pay-go” – For retirees to consume, current workers must consume less • Market processes won’t accomplish that • Tax-financed public pensions must play a role – Other margins of adjustment help • Utilization women, older workers, immigrants, foreign assets • But will not happen automatically and aren’t enough • Huge political issues pending © Michael Smitka 2007 2

Old-age (65 -) share of population 1990 2005 2020 2040 US 12% 16% 20% Australia 11% 13% 17% 23% UK 16% 19% 23% France 14% 17% 21% 26% Germany 15% 19% 22% 29% Italy 15% 20% 24% 35% Japan 12% 20% 29% 36% © Michael Smitka 2007 3

Demographics of aging • Populations change under cumulative impact of fertility & mortality • Mortality is falling: lots of 90 -year olds – See next chart © Michael Smitka 2007 4

Fertility is more important • Population pyramids – Normally have women on the right • men on the distaff side • When cycle across time, can see how age structure interacts • KEY: Population aging is due to rapid decline in fertility – not low fertility © Michael Smitka 2007 6

Japan is “normal” • Spain, Italy, Greece, Portugal • In Asia: – China, Korea – Vietnam, Thailand, Malaysia • even Indonesia • Even southern India (esp. Kerala) • But not Philippines, Laos, Cambodia • US is an outlier © Michael Smitka 2007 19

Total Fertility Rate in Japan and Southern Europe © Michael Smitka 2007 20

Fertility in China Peng Xizhe, working paper, Hitotsubashi University, 2006 Fertility Transitions and its Socioeconomic Impacts in China © Michael Smitka 2007 21

Fertility • Claim: children are “inferior” good – Demand falls as incomes rise, in contrast to normal goods – Can use standard cost/benefit framework • Economic benefits of children now trivial • Meanwhile costs have risen – Accentuated by greater opportunities for women • Consistent survey finding that men and women want on average 2+ children in Japan – But work and marriage patterns intervene © Michael Smitka 2007 22

Mean age at first marriage Greece Italy Portugal Spain Japan © Michael Smitka 2007 23

Men vs Women • LF participation – Trends across time – Trends by age – Evidence (? ) that may be changing • Will flash data, not discuss © Michael Smitka 2007 28

However… • It’s already too late for fertility to stop aging – Almost all Japanese who will be in the workforce in 2030 have already been born – Demographic momentum: few women of childbearing age • So even if fertility rises, impact muted until their children reach childbearing age 40+ years from now – As approach 2055 numbers can shift some • But fundamental issue remains • Only 1. 3 Japanese age 15 -64 for everyone who’s 65+ © Michael Smitka 2007 29

How finance retirement? • At household level, can save – Buy bank deposits, a house, life insurance, stocks & pension funds – Live in house “mortgage free” and draw down other assets • THAT DOES NOT WORK FOR THE ECONOMY AS A WHOLE © Michael Smitka 2007 31

Fallacy of composition • Japan’s economy is “closed” – consumption is equal to domestic production • Most consumption is of services (75+%) • Only housing, furniture truly durable • Retirees must consume out of current production, not stored (saved) production – Working agers must lower their consumption – Will they voluntarily save 30%-40% to buy their parents’ and grandparents’ assets? • I think not! Current savings rate is 2% of GDP!! © Michael Smitka 2007 32

Government must tax • Voluntary savings for part • Private pension funds a growth business in Japan’s aging economy! • Taxation necessary – Savings equal dissavings only by chance • Cf. classic macro paradox of thrift • Equity: inequality within and across generations – An additional 10% of GDP? © Michael Smitka 2007 33

Margins of adjustment (1) • Female labor force participation – Job-place issues – Taxation issues • Difference is 15% within “M” – Only for 30 -45 bracket (15 yrs out of 40 or ≈ 40%) – Women only 1/2 of potential LF – So might add at most 1/2 x 40% x 15% = 3% • In 25 years (2032) 20 -65 pop down 15 mil – Only 9. 9 mil women age 30 -45 so 15% = 1. 5 mil © Michael Smitka 2007 34

Margins of Adjustment (2) • Old-age labor force participation – Retirement is a “normal” good? • But those with education keep working, even in the US – Financial necessity a driver • Policy can push & pull too – Delay in retirement age – Treatment of taxes / payouts [Japan is OK…] • In 25 years (2032) 20 -65 pop down 15 mil – Extending to age 65 adds 1. 6 mil (3%) – to age 69 adds 7. 4 mil (12%) • Shrinking retirees by 1. 6 mil & 7. 4 mil (-4. 5% & -20%) – An overestimate since half of 65 -year-olds already work © Michael Smitka 2007 39

Margins of adjustment (3) • Immigration – A big number • Workforce falling 7. 5 million during decade 2007 -17 – Not impossible, cf. Spain, but big numbers – But understates difficulty • Immigrants also get married, have children – Need 1. 5 immigrants per immigrant worker – And then retire • Immigrants have lower productivity – Language barrier, social barrier, credential barrier – 4 immigrants equal 3 workers? • Bottom line 15 million, not 7. 5 million? © Michael Smitka 2007 42

Margins of adjustment (4) • Foreign savings – Net foreign income now 2. 5% of GDP • And rising – Allows workers to shift out of traded goods • Into healthcare, other services – Implies a trade deficit in the future • But huge assets, so sustainable? • Rising yen partially offsets benefits © Michael Smitka 2007 43

Productivity: Not a Margin of adjustment • A bigger pie • But still need to split it up • Political economy – Easier to raise taxes when an economy grows? – But do elderly vote their interests? – Maybe - and the young tend not to vote at all… • Aging may lower productivity • Less investment: profits when markets shrink? • Less education: opportunity cost when wages flat? – No suggestion to date that demand for education is falling – Can teach old dogs new tricks? © Michael Smitka 2007 44

Sum: Where there’s a will… • Aging will require big shifts in what government does – Other margins of adjustment insufficient – Taxation is contentious! • Generation wars? © Michael Smitka 2007 45

Needed research – Sociology and anthropology of aging societies • How to mobilize retiree power! • How will the young react to providing for them? – Humanities • What will the old read? watch? Write & draw & tell? – Lessons for healthcare provision • Kaigo [介護保険] home healthcare - success story? • Hospital-based healthcare - huge resource issues? – Lessons from local government • How to manage transition to ghost towns – Politics: generation war? © Michael Smitka 2007 46

Addenda • Corrections to “back of the envelope” calculations – Adjusting the savings section to use age-specific savings rates. Working age households surely save more than retirement age households – Adding in capital income, which is surely larger for retirement age households than for working age households • Neither should be large enough to change the fundamental picture – Returns to capital are low, and net of investment and retained earnings payouts to asset owners must be yet lower. But such income does serve to lower the direct claims of those of working age on their own output. – Working age savings rates remain low relative to the overall need for transfers to retirees. Of course market transfers don’t help the significant number of retirees who have few or no assets; if older workers don’t already have a lot stashed away, they will have a hard time accumulating enough in their final working years – and those with the fewest assets are also ones least likely to receive the large one-time retirement bonuses many large firms pay. • But I like to “dot my i’s and cross my t’s” or add jots and tittles. © Michael Smitka 2007 47