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Aging Population = Increased Financial Burden? Don't Be So Sure!

Hisashi Uemura
Professor, Faculty of Human Sciences, Waseda University

With Japan's Respect for the Aged Day falling in September, news items about the elderly tend to increase during this month. They cover topics such as how the number of centenarians has exceeded 50,000, or how the baby boomer generation is moving into the 65-and-older age bracket, pushing the percentage of elderly people over 24 percent. These kinds of reports essentially mean that the life span of Japanese people is increasing, and that it has become common for the elderly to live to an old age. This should be good news, but the public, it seems, feels conflicted. People are concerned that the load on the social security system will increase in conjunction with the aging population. While such news is not exactly fitting for Respect for the Aged Day, it has been reported that 2.8 million senior citizens-about 10 percent of Japanese adults aged 65 and older-have dementia, and that the national medical expenditure for fiscal 2010 was about 37.4 trillion yen, a 3.9 percent increase from the previous year.

If the population continues to age, the number of senior citizens receiving pensions will increase, along with the number of the elderly who fall ill and need nursing care. As a result, social security benefit payments will increase, and since these payments are financed by young people, the financial burden on young people will also increase. Reports like these are depressing, but all we can do is resign ourselves to the inevitable increase in taxes and insurance premiums. Resenting it would be tantamount to resenting the aging population. Or so the story goes. But is the situation really as straightforward as that?

Consider, for example, the idea that older people are prone to illness and less responsive to treatment, and that this has led to Japan's higher healthcare costs. Following this line of reasoning, healthcare costs increase as a population ages. This explanation sounds very plausible. Indeed, it is true that healthcare costs have increased in Japan as the population has aged. An international comparison, however, reveals that countries with aging populations do not necessarily spend more on health care, as shown in the graph below. The U.S. has the youngest population structure of the developed countries shown and does not have a health insurance system that covers the entire population, yet its medical expenditure is by far the highest. Meanwhile, Japan has the oldest population, yet its medical expenditure is the lowest of the developed countries. How could this be?

The scale of a country's medical expenditure is not determined by the age of the population alone. Other factors, such as the level and content of medical care, and the way the country's healthcare delivery system and health insurance system are set up, are more significant. The U.S.'s high medical expenditure is attributed to the cutting-edge medical care available there. People often say hospitals are turning into salons for the elderly, but this does not mean the amount spent on medical care for the elderly is that high. If the amount spent on cutting-edge medical care is minimal, the overall medical expenditure will not be very high. In fact, if senior citizens' appropriation of medical resources is linked to a decrease in the availability of advanced medical care, we could even say that their occupation of hospitals exerts a negative impact on increases in medical spending.

The increase in social security expenses is also strongly related to the economy. Money spent on pensions, medical care for the elderly, nursing care and other welfare services for the elderly, employment of older workers and other programs for senior citizens accounted for 68.7 percent of the social security benefit expenditure in 2009. If we compare this to the 69.5 percent of the expenditure spent on the elderly in 2008, however, we can see that the percentage has decreased. It is expenditures like unemployment benefits and welfare payments that have significantly increased in both amount and percentage. The economic downturn has increased these expenses, which have in turn increased Japan's total social security benefit expenditure. If we increase the financial burden on younger people out of a belief that an increased expenditure is inevitable due to Japan's aging population, we may even aggravate the economic situation and further increase social security expenses.

The factors that contribute to an increase in social security payments in Japan are complex and deeply related to the structure of the social security system, including the kind of out-of-pocket costs individuals must pay and the coordination among different institutions. Even if an increase in benefit payments due to the aging population is unavoidable, this does not mean that the increase will simply mirror the rate at which the population ages. While there are benefit payments that should be increased in a proportion exceeding the rate at which the population ages, we may be able to avoid an increase in payments through institutional planning. In addition, the impact of the financial burden on the economy, as well as people's perception and level of acceptance of the burden, will vary depending on who is responsible for covering the payments out of what kinds of income. If the burden is fairly evenly distributed, the perceived weight of the burden will be reduced, and its negative impact on the economy will be lessened. The relationship between benefits and financial burden is also important. If people are assured they will eventually receive the benefits they are paying for now, they will more readily accept the financial burden, even if it is substantial. However, if the burden is lopsided, there will be a lot of resistance.

Rather than naively assuming that an aging population entails an increased financial burden on society, we need to make a detailed analysis of the effectiveness and impact of social security and rebuild the system based on this analysis. If we do this, our image of aging societies is bound to change. Herein lies the need for promoting research on social security.

Graph of the Medical Expenditure (as a Percentage of GDP) and Population Aging Rate of Various Developed Countries (2007, expressed in percentages)

Data Source: OECD Health Data

Hisashi Uemura
Professor, Faculty of Human Sciences, Waseda University

[Profile]
Born in Gifu prefecture, Japan on March 23, 1952.
Graduated from the Faculty of Law, Kyoto University in 1975.
Entered the Ministry of Health and Welfare (now the Ministry of Health, Labour and Welfare) in 1975.
Served in various positions, such as Counselor of the Cabinet Legislation Bureau, Chief of the Health and Social Statistics Division at the Ministry of Health and Welfare, Chief of the Planning and Pension Management Division at the Social Insurance Agency, and Deputy Director-General at the National Institute of Population and Social Security Research, before taking up his current position as a professor, Faculty of Human Sciences, Waseda University in April 2003.
Was a visiting professor at the Graduate School of Law, Kyoto University from April 2001 to March 2003.

[Major Recent Publications]
Reconsidering Social Security [Shakai hosho o toinaosu], Chuohoki Publishing, 2003. Q&A for Understanding the Health Insurance System [Kore de wakaru Iryo hoken seido Q&A], Minerva Shobo, 2007. (Supervising editor)
The Pension Reforms Young People Want [Wakamono ga motomeru nenkin kaikaku] , Chuohoki Publishing, 2008.
An Illustrated Introduction to Social Security [Zusetsu korekara hajimeru shakai hosho] , Nihon Kajo Shuppan, 2008. (Author and editor)