Economic Effects of Public Pensions（Yoshibumi Aso）
Child Benefits and Macroeconomics Simulation Analyses in an Overlapping-Generations Model with Endogenous Fertility （Kazumasa Oguro,Jyunichiro Takahata）
Sustainability of Budget Deficits（Yoshibumi Aso）
Pension System and Household Consumption and Saving Behavior （Junya Hamaaki）
Analysis of Tax and Social Security Burdens on Elderly People Using Micro-Data of the National Survey of Family Income and Expenditure （Soichiro Tanaka,Masato Shikata,Kohei Komamura）
Government Size and Economic Growth ― Analysis from the Perspective of Both Revenue and Expenditures (Ken Shinohara)
| By Yoshibumi Aso | （Professor, Faculty of Law, Keio University） |
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(Abstract)
While there are various arguments about public pension system reform, this paper examines the conflicting views from the perspective of economic theory. The paper first explains the raison d’etre of public pension systems and then discusses financing systems of public pensions (funding system and pay-as-you-go system). Under pay as you go system, the benefits to the elderly at the introduction of pension system are equal to the sum of present discounted value of net burden of all generations born thereafter. Also, pay as you go pension system has a huge amount of net pension debt, which must be born by future generations. The paper points out that shifting to a funding system is an issue of how many years the repayment of such net liabilities should desirably be spread over. Finally, although consumption tax is generally thought to be a desirable revenue source of pension system, we point out this idea is incorrect from theoretical view point.
Key words: public pension reform, pension debt, transition to funded system
JEL Classification: H55, E62
| By Akira Okamoto | （Professor, Graduate School of Humanities and Social Sciences, Okayama University） |
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(Abstract)
In Japan, where a population shrinkage, a birthrate decline and aging of society are rapidly proceeding, public pension reform is an urgent task. This paper focuses attention on one of the major pension reform proposals that would limit public pensions to basic pensions and would cover the entire cost with consumption tax revenue, and conducts quantitative analysis of the effects that this proposal could have on economic welfare and the redistribution of income within each generation and across different generations. A simulation analysis based on the lifecycle general equilibrium model indicates that although this reform proposal would increase capital accumulation and promote economic growth, welfare as a whole would not improve if changes in the welfare of all of the generations that are affected by such reform are taken into consideration. In other words, the analysis shows that it is difficult to achieve a Pareto improvement even when LSRA transfers between generations whose welfare would decline as a result of such pension reform and generations whose welfare would improve are taken into account . That is because a decline in the welfare of transitional generations would be very significant because of the so-called double burden that would accompany the proposed reform. Meanwhile, if emphasis is to be placed on improving the welfare of future generations, it would be desirable to implement this reform proposal given that it would considerably promote future economic growth and improve the welfare of future generations.
Key words: declining birthrate coupled with aging of society, pension reform, consumption tax, Pareto improvement, simulation analysis
JEL classification: H30, C68
| By Kazumasa Oguro | (Associate professor, Faculty of Economics, Hosei University) |
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| By Jyunichiro Takahata | (Lecturer, Faculty of Economics, Dokkyo University ) |
(Abstract)
In predicting the impact of policies on macroeconomic variables, the government must consider the effect of household fertility choices on demographic trends, as macroeconomic variables can be influenced by population scale. Therefore, this paper presents a comprehensive survey of existing studies with endogenous fertility models and examines the effect of various policies on macroeconomic variables through simulation analysis based on the overlapping generational model (OLG) of Oguro et al. (2011) which determines population growth endogenously, with the growth rate affected by household fertility choices. Our results demonstrate a major effect on future population and public debt predictions studied in a scenario combining fiscal reform and introduction of child benefits.
Key words: overlapping generational model, child benefits, endogenous fertility
JEL classification: C68, D9, E62, H5, H6, J13
| By Yoshibumi Aso | （Professor, Faculty of Law, Keio University） |
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(Abstract)
This paper examines theoretical models that underpin studies on “sustainability of budget deficits”, which have been drawing interest in recent years, and also explains methods of empirical tests. The paper starts with a discussion on the intertemporal government budget constraint in a certainty model and then expands the discussion to under uncertainty. Under uncertainty, the issue of whether or not Ponzi schemes are feasible in a dynamically efficient economy is theoretically important. When the economy is dynamically efficient in the “strict” sense, Ponzi schemes are infeasible. Although it is possible for the risk-free interest rate to be lower than the economic growth rate on average under sufficient uncertainty, it is important to ensure that Ponzi schemes are infeasible even in such a case.
Empirical research on fiscal sustainability started with a study by Hamilton and Flavin, which sought to examine whether the present value borrowing constraint is satisfied. Later, the premise of their analysis (stationarity of primary surplus) was disputed by Wilcox and by Trehan and Walsh, and different tests were proposed. In addition, Bohn proposed another test from a different perspective. This paper explains those methods and points out their problems.
Key words: sustainability of budget deficits, dynamic efficiency
JEL classification: E20, E62, H60
| By Junya Hamaaki | （Assistant Professor, Graduate School of Economics, Hitotsubashi University） |
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(Abstract)
This paper discusses and reviews recent attempts to evaluate the impact of pension system on household consumption and saving decisions, highlighting people's expectations of future pension benefits. First, it provides an overview of the recent trend of research concerning people’s expectations of the future pension benefits they will receive and how their expectations affect household decision making. Regarding the pension expectations, there is a tendency where people who can obtain information on pensions at small cost (receive significant benefits), people for whom the future holds a small degree of uncertainty and people who have many opportunities for exchanges of information formed accurate expectations. In addition, many studies have shown that as individuals approach retirement, expectations gradually become more accurate on average because they update their expectations. Research on household consumption and saving behavior, which are determined based on pension expectations, has also been developed. In recent years, there have been studies which regard pension system reform as a natural experiment and which address the endogeneity of pension assets. In such studies, the degree of substitutability between pension and household assets is estimated to be larger than previously.
Next, the paper evaluates the accuracy of household pension expectations by examining whether consumption reacts to an increase in income arising from the start of pension benefit payment. The analysis indicates that although consumption increases significantly in the starting year of pension benefit payout, it falls back to the previous level in later years. If the increase in consumption resulted from individuals' underestimation of the amount of pension benefits, the level of consumption would remain higher in later years. Therefore, it is reasonable to assume that the increase in consumption is caused by factors other than the underestimation of the amount of pension benefits.
Key words: pension system, consumption and saving behavior, life-cycle/permanent-income hypothesis
JEL classification: E21, H55, D84
| By Soichiro Tanaka | (lecturer, College of Economics, Kanto Gakuin University) |
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| By Masato Shikata | (lecturer, School of Policy Studies, Kwansei Gakuin University) |
| By Kohei Komamura | (professor, Faculty of Economics, Keio University) |
(Abstract)
In order to simultaneously ensure fiscal sustainability and maintain high quality social security systems despite the increasing cost of social security benefits due to the aging of society, it is necessary to concentrate social security-related public expenditures on elderly people with low income. To that end, it is essential to analyze the current economic situation of elderly people and the tax and social security systems.
For this article, we analyzed the economic situation of elderly people and the effects of the tax and social security systems using micro-data of the National Survey of Family Income and Expenditure. As a result, we found that the burden of income taxation on elderly people is lighter than that on people aged less than 65. On the other hand, the burden of social security premiums (medical and long-term care insurance premiums) and own payments of medical and long-term care fees on low-income people is heavy. Regarding social security premiums, the national health insurance premium is reduced for people with income under a certain level and the long-term care insurance premium (for primary insured persons) is calculated according to income brackets. Regarding payment of medical and long-term care fees, there are also measures to support low-income people, including systems that refund medical and long-term care fees paid in excess of prescribed levels. However, these measures may not be sufficiently mitigating the regressivity of the social security burden.
The burden of own payments of medical and long-term care fees increases the poverty rate especially among elderly people. On the other hand, the burden of own payments of medical and long-term care fees has negligible effects on income equality. Changes in income equality are accounted for by changes in the income of elderly people and family members. It is essential to correct the regressivity not only of the burden of social security insurance premiums and medical and long-term care fees on elderly people but also of the burden on working-age people. Therefore, it will become necessary to shift from the policy of giving preferential treatment according to age alone to the implementation of measures to mitigate the regressivity mainly according to income brackets. Moreover, if we take into consideration an expected decline in the level of basic pensions in real terms due to the application of a macroeconomic slide mechanism along with expected increases in the levels of medical insurance premiums for people aged 75 or older and long-term care insurance premiums, it will be necessary to pay sufficient attention in terms of policymaking to elderly people with low income, who are significantly affected by the payment of medical and long-term care fees.
Key words: Income inequality, poverty, the tax burden, the social security burden, and micro-simulation
JEL classification: H20, H53, I32, I38
| By Ken Shinohara | (former official at the Research Department of the Ministry of Finance Policy Research Institute) |
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(Abstract)
This paper examines the long-term effects of government size, as represented by the potential tax and social security contribution burden, on economic growth.
Specifically, using panel data regarding OECD nations for the period between 1970 and 2008, this paper examines how the potential tax and social security contribution burden affects the long-term economic growth rate. Furthermore, it analyses how individual revenue and expenditure items, which represent a breakdown of the burden, affect the long-term economic growth rate, and thereby seeks to empirically indicate whether different configurations of public finance and expenditures have different effects on economic growth.
The empirical analysis indicates that when the potential tax and social security contribution burden exceeds a certain level, it produces robust negative effects on the long-term economic growth rate. Moreover, it is indicated that differences in the expenditure structure have stronger effects on the economic growth rate than those in the revenue structure. In particular, it is also indicated that while a rise in government consumption and government investment have negative effects on the economic growth, a rise in the share of social security expenditure has positive effects.
Key words: potential tax and social security contribution burden, government size, tax mix, economic growth
JEL classification: E62，H20，H50，O40
Any article in the Review reflects the writer's own opinion, and has nothing to do with any statement issued by the Ministry of Finance or the Policy Research Institute.
