Structure of the Social Security Model and Simulation Results

There are various underlying reasons why social security expenditures grow faster than the economy: e.g., per-capita healthcare expenditures grow faster than per-capita GDP (mainly caused by an increase of medical costs to attain more sophisticated treatments which reflect technological progress); the bigger the population share of the elderly, the higher the average per-capita expenditures or the more frequent usage of services become (the age effect); and not only per-capita average expenditures but also the number of social security recipients continue to increase due to longevity and the retirement of baby boomers. This paper, in the context of social security expenditures that are expected to grow faster than the economy, addresses how benefits and burdens for social security in Japan change with various demographic and economic assumptions by constructing a simultaneous equation model that covers healthcare, long-term care and pensions. Our findings reveal the followings. (1) If the estimation is made under the assumptions of the old population projection of 2002 and the current policies that have already been scheduled, the cumulative changes of social security benefits and burdens from 2006 to 2025 will be 2.3% and 4.0% of nominal GDP, respectively. (2) Using the new population projection of 2006 instead of the old one, we find that changes of benefits and burdens are 3.2% and 4.5% respectively; which is mainly due to the increase in the elderly population in the new population projection. (3) If the economy remains sluggish, the change in social security burdens is likely to be 5%. This paper also compares our estimation results with the two Japanese government estimates: the Ministry of Health, Labor and Wealth estimate (2006) in the main text; and the National Commission final report (2008) in the appendix.