The Impact of Demographic Changes on Social Security Payments and the Personal Income Tax Base - Long-term Micro-simulation Approach -

This paper analyses the quantitative impact of future demographic changes on Japan fs fiscal situation, focusing on an inevitable increase in social security payments along with an increase in social security benefits, and its effect on personal income tax-base erosion through further social insurance deductions. The analysis is conducted using a micro-simulation methodology. In the analysis, we use the individual data contained in the Comprehensive Survey of Living Conditions (2010) in order to calculate theoretical values of personal income taxes at both the individual and the macro level from 2009, the base year, to 2060 in five-year intervals. We then compare the theoretical values with those for 2009 as the base year. We also compute theoretical values of the social security payments for each relevant year in the future, referring to several projections of social security expenditures under the current social security system. Major findings of this paper are as follows: (1) When individuals enrolled in the same social security program equally bear a future increase in social security payments due to demographic changes, the total amount of income tax revenue in 2060 will be approximately \3.7 trillion lower than in 2009. In this case, the ratio of income tax revenue to GDP will decline gradually from 1.842% in 2009 to 1.780% in 2060. We also find that the total amount of income tax revenue in 2060 will be reduced by around \0.8 trillion from 2009, when the effect of an increase in social security payments alone is taken into consideration while the other effects including demographic changes such as population decline are excluded. (2) When individuals bear a future increase in social security payments according to the ability to pay, the total amount of income tax revenue will decrease by around \4.0 trillion between 2009 and 2060. In this case, the ratio of the total personal income taxes to GDP will gradually drop to 1.674% by 2060. Total personal income taxes in 2060 will be reduced by around \1.4 trillion from 2009 when the effect of an increase in social security payments alone is taken into account.