The government’s latest estimate that the annual cost of social welfare benefits will reach ¥190 trillion — 1½ times the current level — in 2040 should prompt broad public discussions on measures needed to maintain the system’s long-term sustainability.
Options to address this problem in the face of the rapidly graying and shrinking population are limited: further increases in the public burden in terms of tax and social security premiums, reducing benefits, or preventing increases in medical and nursing care expenses. All of these will likely have to be combined to meet the daunting challenge. Given the enormity of the challenge and anticipated difficulties in reaching a public consensus on painful reforms — in which the hurt will likely need to be shared across a broad spectrum of the population — it’s high time to start the discussion.
Comprehensive reform of the tax and social security systems, based on a 2012 agreement between the ruling and opposition parties, was aimed at addressing the anticipated situation in 2025, by which time the aging of Japan’s society will accelerate as the youngest members of the postwar baby boomer generation turn 75. That agreement called for a two-stage hike in the consumption tax to 10 percent. The second stage has been postponed twice since 2015 and is now scheduled to take place next year. The estimate presented to the government’s Council on Economic and Fiscal Policy gives an idea on the social security costs as of 2040, when Japan’s elderly population is forecast to near its peak.
According to the government’s baseline scenario, the cost of services such as medical, nursing care and pension benefits will reach ¥190 trillion in 2040, compared with ¥121.3 trillion in fiscal 2018. The 2040 figure is nearly double the general account expenditures in the government’s fiscal 2018 budget and will be equivalent to 24 percent of the nation’s gross domestic product, up from 21.5 percent today.
Social security benefits are covered by government spending and the premiums that people pay. Forecasts show that the increase in the elderly population will start to slow down after 2025, but the decline in the number of people in the productive age bracket of 15 to 64 — the primary payers of premiums — will accelerate, falling by as many as 15 million from the current number by 2040. In 1965, one senior citizen age 65 or older was supported by nine people in the active working population; in 2040, there will be only three working-age people to support one senior citizen.
The cost estimate assumes that medical and nursing care services will be maintained as they are. What needs to be discussed going forward is whether the consumption tax and social security premiums will be further raised to cover the mushrooming expenses, or whether to explore measures to curb the increase in benefits.
An expert has estimated that to cover the cost increases, the consumption tax will need to be hiked by at least an additional 6 percentage points after it has been raised to 10 percent. Ideas that are reportedly already being weighed include getting people age 75 or older to pay 20 percent of their medical and nursing care expenses out of pocket, instead of the 10 percent that they pay in principle today, or ceasing to cover the treatment of minor illnesses or care services for people whose conditions are not serious with health insurance and nursing care insurance. Reform of social security programs to increase the financial burden on wealthy senior citizens will also be on the agenda. Other attempts to curb growth in medical and nursing care expenses may include efforts to keep people healthier as they age through preventive medicine.
The government also announced an estimate of the number of medical and nursing care workers required in 2040 to cover the expanding needs of the aging population. The nation will need 3.28 million people providing medical services, up 190,000 from fiscal 2018, and 5.05 million in the nursing care sector, an increase of 1.71 million. Combined, the medical and welfare sectors will need 10.65 million workers — meaning that roughly 1 in 5 people in the workforce will be employed in these sectors.
Securing that much manpower alone will be a daunting challenge amid the shrinking population — particularly as the nursing care sector struggles even today to fill its staffing needs. Long-term efforts to improve wages and other conditions for care workers, which remain well below the all-industry average, will be needed.
Since none of the challenges posed by the forecast of social security costs will have easy answers, discussions to address them have to start today.