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UNDERSTANDING THE JAPANESE BUDGET 2004


IV
BUDGET PROGRAM BY FUNCTION


 
1. Social Security

(1) Circumstances surrounding social security-related expenditures
1) Aging of the population in Japan
     The percentage of the population aged 65 or older was 17.3% in 2000, whereas it was only 6.3% in 1965. This percentage, approximately as much as European countries, is projected to increase very rapidly, reaching 28.7% in 2025 and 35.7% in 2050. In fact, the Japanese population will age faster than any other industrialized country. The number of people who are 65 or older is estimated to increase to about 2 times its present level in 2015. On the other hand, because of the increase in the percentage of unmarried persons, Japan's total fertility rate (i.e., the average number of children a Japanese woman will bear in her lifetime) hit a low mark of 1.32, which is supposed to be far below the level at which a country can maintain its population size. With a simultaneous increase in the elderly population and decrease in the birthrate, the ratio of working age population will drop; the ratio of people who are 65 or older to the number of people between the ages of 20 and 64, was 1 to 4 in 1995, but is projected to be 1 to 2 in 2025.

2) Social security-related expenditures in the national government's budget
     Reflecting the rapid advance of aging, social security-related expenditures are treated as important issues in the formulation of budgets for each fiscal year, and budget amounts have been increasing every year. Social security-related expenditures in the national budget account for ¥19.8 trillion out of the ¥82.1 trillion in total budget expenditures in FY2004, or more than 40% of the so-called general expenditures of the budget; that is, all expenditures other than those for serving the national debt and the allocation of tax grants to local governments. In future, social security-related expenditures are forecast to continue increasing year by year with the advance of population aging, and to increase more rapidly in future, creating even greater stringency in fiscal balance.

 

Chart IV -1-(1) Ratio of People Older than 65 Years Old within the Total Population

 Chart IV -1-(1) Ratio of People Older than 65 Years Old within the Total Population

 
Chart IV -1-(2) Trend of the Number of Births and the Total Fertility Rate

Chart IV -1-(2) Trend of the Number of Births and the Total Fertility Rate

 

Chart IV -1-(3) Change in the Demographic Pyramid

Chart IV -1-(3) Change in the Demographic Pyramid

(Note) Figures from "Japanese Future Demographic Projections" (National Institute of Population and Social Security Research, January 2002)

(Click chart for larger view)

Chart IV -1-(4) Trends of Social Security Related Expenditure

Chart IV -1-(4) Trends of Social Security Related Expenditure

3) Increase in social security benefits and future projection
     In response to the aging of the population and the improvement in the social security system, the total benefits of social security services have been increasing rapidly. The total amount of such benefits has increased by 22 times since FY1970, reaching ¥78 trillion in FY2000. Approximately 68% goes to benefits for the aged, and 22% is subsidized by the national government's general tax revenue.
     In May 2004, the Ministry of Health, Labour and Welfare (MHLW) made a projection regarding the future costs and benefits of the social security system. According to this estimate, the cost of social security benefits is projected to continue increasing in future, reaching ¥152 trillion (about double the current level) in 2025. It is projected that social security benefits as a percentage of national income will rise to 29% by FY2025, from 20.5% in FY2000. In other words, this means social security benefits will account for almost 30% of all economic activities by the Japanese citizens.

4) Main issues to be tackled in future
     With the increasing pace of population aging and declining birth rates in future, benefits and contributions are expected to expand at a pace far exceeding the economic growth. In view of this, a major issue to be tackled from now on is to construct a sustainable and efficient social security system that is balanced with the economy and public finance. Specifically, system reforms will need to be promoted across the whole spectrum, including pensions, health care, long term care, and public assistance, while benefits and costs will need to be controlled by reviewing and optimizing them in line with recent trends in consumer prices, wages, etc.
     In the following pages in this Chapter, we will explain the current situation of each system and future issues. Planned reforms of each system are outlined below.

  (Pension)
       - Implementation of reforms to secure a balance between benefits and burdens in future. (FY2004)
  (Medical care)
       - Review of the scheme of medical care insurance systems (reorganization and integration of insurers in unit of prefectures, etc.), system reforms including review of the content and scope of public insurance benefits. (Planned to start in FY2005, implemented as soon as possible)
  (Long term care)
       - Redesigned as a system in balance with the national economy and public finance, by reviewing the co-payment, strengthening the functions of insurers, etc. (FY2005)
  (Public assistance)
       - Reduction or optimization of benefit levels, and other radical reviews of both system and implementation. (FY2005)
 

Chart IV-1-(5) Trends and Projection in Social Security Expenditures

Chart IV -1-(5) Trends and Projection in Social Security Expenditures

(unit:trillion yen, %)

 

1970

1980

1990

2000

 

2005

2010

2025

Social security benefits (A)

4

25

47

78

91

110

176

National Income (NI) (B)

61

200

351

381

376

414

557

Ratio of social security benefits to NI (A/B)

5.8%

12.4%

13.5%

20.5%

24%

26 1/2 %

31 1/2 %

(Notes) 1. Social Security expenditure is the total of benefits paid under the publicsocial security system.
2. Figuresfor FY2000 or before is actual. Figures for FY2025 or later is estimated byMinistry of Health, Labour and Welfare in May 2002

2. Outline of the social security system in Japan
(2) Pension insurance system

     Japan's public pension system is, broadly speaking, two-layered. The first layer is called the "Basic Pension" scheme and covers the entire population. The level of the Basic Pension benefit is at present ¥66,417 per month, irrespective of the income level of the insured. On top of the Basic Pension there exist several separate parallel pension schemes, such as Employees' Pension Insurance for Salaried Workers and Mutual Aid Associations (MAAs) for Government Employees. These are the second layer of the public pension system. The benefit levels in the schemes in this second layer differ in proportion to the salary of the insured. The model pension benefits of an insured person newly eligible for payment is at present ¥235,258 (including the Basic Pension benefit), which is comparable to other countries.
     A major revenue source for the public pension is the social security contributions of the insured and their employers. Approximately one-third of the Basic Pension benefits is in principle subsidized by the national government's general tax revenues. In total, government subsidies from general tax revenues for the public pension (except MAAs) amount to about ¥5.8 trillion in FY2004.

  (A) Current state of the pension system
     The pension system in Japan is a step-up contribution system, while many of the European countries adopt a pay-as-you-go system. A step-up contribution system is a system similar to the pay-as-you-go system with funds.
     Japan adopts this system for the following reasons: In countries like Japan, where the population is aging much faster than other countries, the pay-as-you-go system, as it matures, would result inevitably in a rapid increase in the ratio of social security contributions to income level. The step-up contribution system is designed to accumulate in advance, before the system reaches maturity, the funds necessary for future benefit payments, thus preventing the level of social security contributions from soaring as the system matures, and thereby ensuring fairness among generations.
     In Japan, pension premiums are at a low level compared to other countries. This is in spite of an ongoing rise in step-up insurance contributions, and the fact, moreover, that population aging in Japan is expected to advance at a remarkably high pace compared to other countries. Furthermore, despite the fact that Japan has adopted a step-up contribution system, the increase in premiums was frozen in the pension reforms of 2000, in view of the prevailing economic situation.

Chart IV-1-(6) Outline of Public Pension

Chart IV -1-(6) Outline of Public Pension


Table IV-1-(1) National Pension System

Table IV -1-(1) National Pension System


Table IV-1-(2) Major Pension System for Employees

Table IV -1-(2) Major Pension System for Employees

  (B) Change in social and economic situation
     As aforementioned, Japan is experiencing the rapid aging of the population. However, there are many elderly persons who receive incomes at least on a par with those of persons in current employment, and own more assets than them. When considering social security for old age in future, therefore, it will be important to be based on the standpoint that the living expenses needed in old age should by covered by combining diverse means of income, including employment earnings, private pensions and savings. Also, this issue will need to be approached from the viewpoint of the income and asset ownership situation of elderly persons, rather than uniformly treating them as "vulnerable citizens."

Table IV-1-(3) Development of a rapidly aging society

 

1960

2000

2050

Drastically increasing life expectancy

Female
Male

70.19
65.32

84.60
77.72

89.22
80.95

Declining fertility rate

2.00

1.36

1.39


Chart IV-1-(7) Economic Situation surrounding the Elderly

     There is hardly any differences in the average incomes of elderly households compared to those of other age groups in income distribution.

¤ Average income per household member (excluding three-generation households)

Average income per household member (excluding three-generation households)

     Elderly households outperform working households in terms of savings and Assets, owning about twice as much in savings on average.

¤ Average savings and assets per household

Average savings and assets per household

 
  (C) Pension System Reform
     There is currently an imbalance between benefits and burden in the pension system, because premium rates have not been raised sufficiently. That is, if current benefit levels are maintained, the existing premium rate of 13.58% will have to be raised to 26% in future (or 23%, if the ratio of state contribution to basic pension benefits is increased to a half from current one third.
     Therefore, the task is now to review benefits and contributions in line with factors such as the aforementioned trends in population aging and declining birth rate, changes in socio-economic circumstances, and so on, and to build a sustainable, and stable system that achieves a long-term balance between benefits and burdens. As such, the government has decided to implement the measures listed below.

     (Note) Until now, in fiscal recalculation once every 5 years, we have adopted the method of reviewing benefit levels and future premium levels based on population statistics, changes in future economic projections, etc. In the present reforms, however, we will adopt the method of fixing the final premium level and paying benefits within the range of those contributions, while automatically adjusting benefit levels in line with the declining birthrate and other changes in socio-economic circumstances.

 


a. Outline of 2004 pension reform (main elements)

[Automatic adjustment of benefit levels by the "contribution level fixing method" and the "macroeconomic-indexation method"]
*
Introduction of "Contribution Level Fixing Method"-- a method which automatically adjusts the level of benefits to make both ends meet after fixing the future contribution level.
§"Macroeconomic indexation method"
Reduction of the ability to bear social security burdens in the whole society caused by declining labor force will be reflected in the benefit level automatically.

 
(Employees' Pension)
Benefits will be maintained more than 50% of average income of the working generation. (standard case: 50.2% in FY2023)
   
 
(Employees' Pension)
Contribution rate will be: 1) raised by 0.354% per year from Oct. 2004 onward. (at present: 13.58%)
2) fixed at 18.30% from FY2017 onward.
(National Pension) (in FY2004 values)
Amount of monthly contribution will be: 1)  raised by ¥280 per year from Apr. 2005 onward. (at present: ¥13,300)
2) fixed to ¥16,900 from 2017 onward.
 
[Ratio of State contribution to Basic Pension benefits]
*Ratio of state contribution to Basic Pension benefits will be raised to 50% by FY2009.
 
   - From FY2004: Raise in accordance with the increase in revenue by reviewing the taxation on pension benefits.
   - FY2005, FY2006: Raise to an appropriate level after the implementation of necessary tax measures, while taking the economic and social situation into account.
   - By FY2009: Raise to 50% of Basic Pension benefits after ensuring consistencies with the governments economic and fiscal policies, taking the progress of the social security reform into account as a whole, and implementing drastic tax reform to ensure stable revenue sources.
 
b. Measures in the FY2004 budget
     - Indexation (-0.3%) of pension benefits in line with the decline in consumer price in 2003.

 

   - Increase in state contribution to basic pension benefit (¥28.2 billion), funded by increased revenues due to the revision of taxation on pension benefits.

(2) Public health insurance system
     The public health care system in Japan is divided into several insurance schemes as described on the next page. Every citizen belongs to either scheme according to the insured's job engagement.
     Regarding to the source of revenue, (1) patient's co-payment, (2) social security contributions by the insured and their employers, and (3) national- and local- government subsidies cover approximately 15%, 53%, 32%, respectively, of the total public medical care expenditure in FY2001. The total amount of national government subsidies in the FY2004 budget is ¥8.1 trillion, increased by ¥0.4 trillion from the FY2003 budget.

(A) Current State of the Health Insurance System
     Because of the rapid increase in medical cost and slow increase in revenues, the public health insurance system continues to face severe budget constraints. MHLW's medium-term projection shows that the annual growth rate of total public medical care expenditure (approximately 4%) remains far above the expected growth rate of revenue sources. In order to keep the public insurance system sustainable without raising contribution rate, it is inevitable that the growth of expenditure must be controlled to a level that is in line with economic growth. A major issue is how to control the growth of total medical expenditure for the elderly. The average medical cost for the elderly (at and over 65 years old) is 5 times as high as that for younger persons (under 65 years old). The annual growth rate of total medical expenditure for the elderly in the past decade was 8%, and is expected to remain high over the medium-term (approximately 5%), much higher than the growth of the relevant population (approximately 1.5%).

(B) Current issues and reform of public health insurance

  1. Recent reform
(1) The main aspects of the most recent reform in 2002 are as follows;
      - The co-payment rate for employer's insurance (subscriber and dependent's inpatient) was raised from 20% to 30%. As a result, co-payment rates for all schemes are now unified at 30%.
      - The limit on monthly amount of co-payment was raised from [63,600 yen + 1% of the actual medical cost] to [72,300 yen + 1% of the actual medical cost].
      - General outpatient drug co-payment was abolished.
      - The premium rate for government managed health insurance was raised from 85% of monthly income to 82% of annual income (including bonus).
      - The senior healthcare scheme was reformed in the following aspects; i) the eligible age would be raised from 70 to 75 over a 5 year period; ii) the proportion of government subsidies to total insurance expenditure would also be raised from 30% to 50% over the same 5 year period; and the co-payment rate was unified at 10% (20% for those on or above a fixed level of income).
    (2) Medical fees and drug pricing were reduced by 2.7% in 2002 and 1.0% in 2004 (figures are in terms of the contribution rate to total medical expenditure).
 
2
.

Expected Reforms in the Near Future
    (1) Based on the supplementary provision of the 2002 reform act, a cabinet decision was made on March 28 on the following reforms;
      i) merger and reorganization of insurers to the basic unit of prefectures,
      ii) establishment of a new medical system for the elderly,
      iii) reform of the medical fees system (e.g., separating inpatient care fees into fee-for-service and hospital-fee elements, and shifting the hospital-fee elements including medication and examination to prospective payment system*) * grouped by DPC (Diagnosis Procedure Combination)
    The government will further discuss details, aiming for i) and ii) to come into effect from 2008, and iii) to take place as soon as possible.
   
(2) The cabinet decision "The Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" also provides a wider range of agenda, e.g. reducing the scope of public health insurance coverage and introducing policies to reduce the growth of medical care expenditure for the elderly to a maintainable level.
 
Table IV -1-(4) Outline of the Major Health Insurance Systems in Japan

 

 

Health Insurance

National Gov't Employees' Mutual Aid Association

Local Gov't Employees' Mutual Aid Association

National Health Insurance

Name

Gov't-managed Health Insurance

Association-managed Health Insurance

National Gov't Civil Servants

Local Gov't Civil Servants

Self-employed, farmers, etc.

Retired

Eligible subscriber

Employees of Small-Medium firms

Employees of Large firms

Insurer (Number of organization)

Government

Health Insurance Association (1,722)

Mutual Aid association of each ministry (24)

Mutual Aid association of each local gov't (54)

Municipality
 (3,235)

National Health Insurance Associations

Municipality
 (3,235)

Numbers of subscriber (million) Dependents

19.12
17.18

14.94
16.08

1.13 (2000)
1.5 (2000)

2.95 (2000)
3.69 (2000)

44.77
--

4.18
--

4.96 (2000)
--

Premium rate:Subscriber Employer

4.10%
4.10%

3.727% (Avg.)
4.787% (Avg.)

2.46-5.00%
2.46-5.00%

4.26% (Avg.)
4.26% (Avg.)

Avg. premium per family ¥149,000 (2001)

Gov't subsidies to : Administrative cost Medical cost
Contribution for the healthcare for elderly

All
13%

16.40%

None
¥13.0 billion

--

All
--

--

All (by local gov't)
--

--

All
50%

--

All
32-52%

--

All
--

--

Co-payment

30%


Chart IV-1-(8) Situations surrounding the Healthcare System

1)  Trends in healthcare expenses
     Healthcare expenses are growing year by year. Such expenses for the elderly are growing at a particularly rapid rate, and already account for one-third of the nation's healthcare cost.

1) Trends in healthcare expenses

2)  Benefits and burden by generation
     There are dramatic disparities in healthcare cost benefits and burdens among Japan's generations.
 


Comparison of per capita healthcare cost, personally-borne cost, and insurance premiums (yearly amount) by age group (Estimates based on actual results for FY2000) Per capita in-hospital healthcare cost for the elderly

2) Benefits and burden by generation

Notes:
1. Per capita healthcare cost and personally-borne cost are calculated by dividing the healthcare cost and personally-borne cost for each age group by the number of people paying into the system in that age group.
2. "Personally-borne cost" refers to personally-borne cost in the health insurance system
3. Per capita premiums are calculated by dividing the premiums of payers in each age group (householders in municipal national health care programs) by the number of people paying into the system in that age group.
4.

Some totals may not match due to rounding.

 

3)

Per capita healthcare cost of the elderly by prefecture
     The per capita healthcare cost is marked by considerable regional differences. Also, a trend is apparent where per capita cost rises in line with the number of sickbeds in the prefecture.

 
Per capita healthcare cost of the elderly and the number of sickbeds to 100,000 people (FY2001)

3) Per capita healthcare cost of the elderly by prefecture

Number of sickbeds per 100,000 people
(excluding "geriatric medical care facilities for the elderly")

Note 1: In-hospital healthcare costs include cost of meals during hospitalization
Note 2: The number of sickbeds per 100,000 people was calculated from the total number of hospital sickbeds and sickbeds in clinics on October 1, excluding the number of sickbeds in "geriatric medical care facilities for the elderly," and based on population figures as of October 1 from the Statistics Bureau of the Ministry of Public Management, Home Affairs, Posts, and Telecommunications.

(3) Long term care insurance system
     Benefits paid through the long term care insurance system, which started in April 2000, are growing by more than 10% per year because of a rapid increase in recipients, etc. Thus, both insurance premiums and the public expenditure burden that support these benefits are also rising rapidly. Furthermore, according to forecasts by the Ministry of Health, Labour and Welfare, these are to increase 4-fold in amount (¥5.5 trillion -> ¥20 trillion), and 3.5-fold in proportion to national income by FY2025. The gap with the national economy is thus forecasted to widen further.
     Therefore, in the reform of the long term care insurance system, which is to be implemented in 2005, it is necessary to redesign the benefits level and system in order to balance with the nation's economy and finances and make it affordable into the future. The specific measures to be taken are as follows.
     - Provision of services that are proper, fair and oriented to the user
    (proper recognition of nursing needs, care management, and promotion of information disclosure, etc.)
     - Increased efficiency of nursing services
    (further promotion of participation by private companies, amendment of nursing charges to reflect the earnings situation of private-sector businesses, etc.)
     - Strengthening of insurer functions
    (prevention of improper claims, etc.)
     - Review of the style of public insurance benefits
    (increase in recipient's own contributions (now 10% -> 20-30%), exclusion of accommodation costs, meal expenses, and so on, limitation on the range of beneficiaries with special privileges as low earners)
     - Introduction of total amount management or growth rate management method in public insurance benefit costs

(4) Welfare services for child rearing
     The government formulated a plan for key child-rearing support measures, the Angel Plan (1995-1999) in Dec. 1994. In addition, the government drew up a new concrete plan, the New Angel Plan (2000-2004) in Dec. 1999. Under this plan, various measures have been taken, such as increasing the capacity for baby nurseries and the number of nurseries that offer night-time or early-morning care.

(5) Welfare services for persons with disabilities
     To promote measures for social participation by the disabled, the government has drawn up a "Basic Plan for the Disabled." This stipulates basic directions for disabled welfare measures to be implemented in the 10-year period from FY2003 to FY2012. The government has also formulated a "5-Year Plan for Implementation of Priority Measures" aimed at the first five years of that Plan.

Chart IV-1-(9) Situations surrounding Long Term Care Insurance System

1)

Trends in number of service users

  The number of people using nursing care services is growing rapidly.

1)Trends in number of service users

2)

Trends in benefits paid through the long term care insurance systems

  Long term care insurance benefits are rising considerably year-by-year.

2)Trends in benefits paid through the long term care insurance systems

3)

Trends in premiums for long term care

  Insurance premiums for both the young and elderly are growing rapidly in line with increases in benefits.

3)Trends in premiums for long term care


(6) Public Assistance
     The public assistance system serves as an ultimate safety net for the people's subsistence, by guaranteeing the lowest minimum standard of living to those who are genuinely prevented from living independent lives.
     As public assistance guarantees a certain income to recipients, a number of problems have been pointed out. These include: 1) the fact that the benefit level and its enforcement have led to cases of "moral hazard" arising in efforts to protect a certain level of income by recipients; 2) the occurrence of a phenomenon whereby the disposable income of beneficiaries and that of members of the general low-income population have become reversed; and 3) a gap of almost 20 times gap in coverage by different regions.
     Therefore, a radical review in both of the system and its implementation is required. This would include measures such as 1) appropriately reducing or abolishing public assistance levels and additions, 2) reviewing ways of providing various forms of assistance, 3) setting periodic reviews of time limits for the implementation of assistance, and 4) promoting efforts designed to correct implementation by local authorities through appropriate burden sharing between the central and local governments.

Chart IV-1-(10) Situations surrounding Public Assistance

1) Trends of persons receiving public assistance and the public assistance budget
The budget has grown in line with the rapidly increasing number of recipients

1)Trends of persons receiving public assistance and the public assistance budget

2)

Comparison of actual consumption and the public assistance standard in a three-member household  (married couple and one child) of a laborer (month)

 
A review of the benefit level for public assistance based on the actual consumption of a general low-income household is required.

2)Comparison of actual consumption and the public assistance standard in a three-member household  (married couple and one child) of a laborer (month)


(7) SocialSecurity Related Expenditures (General Account)
(unit:billion yen)

 

FY2003
(Initial)

FY2004 (Initial)

 

Growth rate

Public Assistance

1,521,684

1,748,858

+14.9%

Social Welfare

1,727,075

1,633,871

-5.4%

Social Insurance

14,651,379

15,380,234

+5.0%

Public Health Service

514,157

503,351

-2.1%

Measures for the Unemployment

576,436

530,691

-7.9%

Total:
Social Security Related Expenditures

18,990,731

19,797,005

+4.2%


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