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Disaster awaits if graying Japan delays social security reforms

Time to raise the pension eligibility age and share the health insurance burden more equally

| Japan

What will Japan be like 12 years from now, in the year 2030? The National Institute of Population and Social Security Research in Tokyo tried to answer that question -- at least partially, anyway -- in a recent report.

Japan's population that year will be 119.13 million, according to the report, or 8 million fewer people than in 2015. Driving that decline will be a steep increase in the number of Japanese age 75 or older, which will rise by about 7 million to 22.88 million. The report also projects that all 47 prefectures will have smaller populations by that year. In short, Japan will join the club of "super-aged" countries.

Such changes in the population structure will impact a broad range of areas, from economic growth, public finances and social security systems to the management of local governments and the maintenance of social infrastructure, such as roads, bridges and water supply and sewerage systems.

What is clear about Japan's public finances and social security programs is that unless all generations share the pain of spending cuts and an increased tax burden, the current systems will collapse. This is not a matter of waiting and seeing how things turn out.

The most pressing challenge is to prevent public health care and nursing care costs from ballooning so quickly. These expenses have been growing at a faster clip than the economy since the start of this century and are likely to rise even faster as 2030 approaches.

Given that economic growth is a barometer of taxpayers' ability to bear financial burdens, the warning bells about the sustainability of the systems are already loud and clear.

Whatever shape the reforms take, one thing that cannot change is the existence of a universal health insurance system covering all citizens. Japan must not allow a considerable portion of the population to go uninsured, as has happened in the U.S. Here, private medical insurance holds the key. While public health insurance forms the base for ensuring medical services are provided across the country, private insurance can play a supplementary role that enables the country to maintain universal health care.

Private insurance companies are increasingly offering policies that cover advanced medical treatments not included in public insurance.

Private insurance can play a huge role in nursing care, too, as it can facilitate the wider use of artificial intelligence and robot technology, which would ease chronic manpower shortages in the sector. Policymakers should take measures that enable more overseas caregivers to work in Japan. They should also revise the nursing care insurance system so that people who provide nursing care for family members at home are eligible for cash payouts.

Japan must also take steps to cope with the spread of dementia, whose sufferers are projected to rise to 8.3 million in 2030 from 5 million at present. Those measures should include ramping up research into preventing and treating the disease through close partnerships with foreign governments and laboratories.

In financing the health insurance system, it is essential that the expense burden on each individual is commensurate with their wealth. That means using a patient's income and assets -- rather than their age, as is the current practice -- for determining their out-of-pocket fees.

Another target for reform is public pensions. First and foremost, the pension eligibility age should be raised to 70 from 65. Most major Western countries have already increased it to 67 or 68, and Japanese live longer than Westerners on average.

In tandem with that change should be labor market reform. Pension reforms would take hold better if systems were introduced to increase liquidity in the labor market and enable seniors to work in a more flexible manner. The environment for raising the pension eligibility age would improve if more seniors were motivated to continue working and therefore still contribute to social security.

The Health, Labor and Welfare Ministry plans to review the financial health of the country's public pension systems in 2019. If, during that process, the ministry embraces unrealistically high projections for economic growth and other indicators, that will only postpone reforms that are badly needed. Doing so would be an act of betrayal toward younger Japanese. The forecasts therefore need to be conservative.

To prevent Japan's public finances and social security programs from collapsing, Japan needs a "compass" to guide it. That compass, in this case, is a medium- to long-term blueprint for securing the necessary financial resources.

Relying on quick and easy ways to drum up cash will eventually only serve to exacerbate the existing distortions in the systems. Now is the time for the government to start working out a road map for the steps it has to take after the consumption tax is increased to 10% in October 2019.

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