Open Journal of Social Sciences, 2015, 3, 138-144
Published Online November 2015 in SciRes.
How to cite this paper: Fukawa, T. (2015) Japanese Social Expenditure under Rapid Population Ageing. Open Journal of
Social Sciences, 3, 138-144.
Japanese Social Expenditure under Rapid
Population Ageing
Tetsuo Fukawa
Institution for Future Welfare, Tokyo, Japan
Received 23 October 2015; accepted 13 November 2015; published 16 November 2015
Copyright © 2015 by author and Scientific Research Publishing Inc.
This work is licensed under the Creative Commons Attribution International License (CC BY).
Japan is suffering from low fertility for more than two decades, and Japanese social security sys-
tem needs a structural reform to be more effective and sustainable. In this paper, we discussed
structural issues in the Japanese social security system, which will provide the basis for containing
social expenditure in Japan. Some Japanese benefits, such as child-rearing support and benefit for
low income families as well as long-term care benefit, need to be increased. On the other hand, it is
important to incorporate right incentives in the system for healthcare and LTC services, and new
forms of solidarity are indispensable to make Japanese social security system sustainable.
Social Expenditure, Population Ageing, Public Pension System, Public Healthcare System,
Long-Term Care System, Solidarity
1. Introduction
The Japanese population is ageing rapidly with a very low fertility since the 1990s. This low fertility together
with a long life expectancy makes it more serious and difficult to reform social security system in Japan. Japa-
nese social security system, namely public pension system, public healthcare system, long-term care system,
support for child-rearing, and social welfare system, in general needs a structural reform to be more effective
and sustainable, but the process is under way with many difficulties.
Entire working population has been covered by the public pension system since 1961. Japanese public
pension is a multi-tiered system. The first-tier is the Basic Pension, which provides a universal coverage. The
Employees Pension Insurance (EPI) covers most of employees in private sector, although it does not cover most
of part-time workers. The contribution to the EPI is 17.8 percent of earnings since October 2015, shared equally
by employees and employers. The amount of old age pension received by retired employees is the sum of Basic
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Pension (Basic part) plus the earnings related part. For the elderly households, the share of public pension bene-
fits to the total income was 69 percent in 2012, and about 60 percent of them depended completely on public
pension. The expenditure on public pension was 11 percent of GDP in 2013. The importance of employer-
sponsored pensions has been increasing due to public pension reforms in recent years.
Total population has been covered by public health insurance since 1961. How to deliver and finance health-
care services for the elderly has been always a key issue, and since 2008 those who are 75 years old or over have
been covered by a program named Healthcare System for the Advanced Elderly. Patients are free to choose phy-
sicians and hospitals, although there is some restriction. Both inpatient and outpatient services are provided in
Japanese hospitals. While hospitals can enjoy economy of scope, there is severe competition in outpatient ser-
vices between hospitals and practitioners [1]. In order to correct excessive competition, it has been considered
that hospitals should be classified by function and patient flow streamlined. Most healthcare services used to be
reimbursed on an itemized fee-for-service basis, and the price of each service is specified in the Medical Fee
Schedule (Note 1). The same nationwide fee schedule is applied to practitioners and hospitals. The national
healthca re expendi ture was 8.3 percent of GDP in 20 13.
The aging of the population has been increasing the demand for formal long-term care (LTC) services. This
situation is exacerbated by increased female labor force participation and a cultural change as more women are
questioning their traditional role as the primary family caregivers, particularly for their husband’s parents [2].
The LTC insurance has been implemented since April 2000. Informal care is still important, although the LTC
insurance benefits have become indispensable for the frail elderly. Many de facto institutional care services are
provided under the name of home care services in Japan. Since the increase in the capacity of institutional care
has been outpaced by the increase in the demand for them, most families have to wait for many months or years
for the admission. The total LTC expenditure was 1.8 percent of GDP in 201 4.
The local governments are mainly responsible for the welfare service delivery. However, there are 17 hun-
dreds local governments in Japan with huge differences in terms of population, financial strength, administrative
capability, etc.
This paper aims to identify str uctural issues in the Japanese social secur ity system from national and interna-
tional perspectives. These issues are mutually related, and the purpose of this paper is not to make an exhaustive
list of issues but to id entify some issues, which we believe will provide the basis for containing social expendi-
ture in Japan and may provide implications for social security reforms in other developed countries.
2. Japanese Social Expenditure from International Perspective
The relation between ageing rate (the proportion of those aged 65 or over to the total population) and social ex-
penditure as percent of GDP is quite different among developed countries. Figure 1 shows ageing rate in X Axis
and social expenditure as percent of GDP in Y Axis for 6 countries during 1980-2014 for 5-year interval. Japa-
nese social expenditure through public programs was 23.1 percent of GDP in 2011, compared to 31.9 percent in
France, 28.1 percent in Sweden and 25.8 percent in Germany in 2014. The ageing process is quite remarkable in
Japan, with a consecutive increase in social expenditure. Compared to Japan, increase in social expenditure is
rapid in France and Sweden, with a relatively mild increase in ageing rate. German social expenditure has re-
mained at 26 to 27 percent of GDP during 1995-2014. The Japanese aging rate is the highest since 2000, but
Japanese social expenditure level has always been lower than that of USA (Note 2).
Table 1 shows social expenditure by branch in 2011 for 6 countries. This table contains various definition
problems, and simple comparison is sometimes misleading. However, it is safe to say that Japanese social ex-
penditure looks very much biased towards the elderly. There seems to be little room in Japan to increase public
pension benefit. Japan is suffering from low fertility for more than two decades, but family benefit in Japan is
still quite low after many laws and measures since 1990. Benefits for low income families and handicapped are
also quite low in Japan.
3. Structural Issues in the Japanese Social Security System
1) Public pension system
The Japanese population is already among the most aged in the OECD countries, and ageing rate is 26 percent
in 2014 (Table 2). According to the latest population proj ection in 2012, total popu lation will be 97 million and
ageing rate will be 39 percent in 2050, with fertility rate below 1.4 in future (Table 2). The projection results
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Figure 1. Aging rate (X axis) and social expenditure/GDP (Y axis) in 6 countries: 1980-2014. Source: OECD Health Data
2015 and OECD Social Expenditure Database 2015.
Table 1. Social expenditure by branch: 2011.
(% of GDP)
France Germany Japan Sweden UK USA
Old age 12.5 8.6 10.4 9.4 6.1 6.0
Survivors 1.7 2.0 1.4 0.4 0.1 0.7
Incapacity related 1.7 2 .0 1.0 4.3 2 .5 1.4
Health 8.6 8.0 7.7 6.7 7.7 8 .0
Family 2.9 2.2 1.4 3.6 4.0 0 .7
Active labour market 0.9 0.8 0 .2 1.2 0.4 0 .1
Unemployment 1.6 1.2 0.3 0.4 0.4 0 .8
Housing 0.8 0.6 0.1 0.4 1.5 0.3
Others 0.6 0.2 0.5 0.7 0.2 0 .9
Total 31.4 25.5 23.1 27.2 22.7 19.0
Source: OECD Social Expenditure Database 2015.
8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0
Ageing rate(%)
Social Expen diture /GDP (%)
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Table 2. Trends of population and social security benefits in Japan: 1960-2050.
Year Population Threshold
age a TFR Life
Social security benefits as % of GDP
1960 93.4 5.7 3.4 59.0 2.00 67.8 3.9
1970 103.7 7.1 4.2 60.6 2.13 72.0 4.7
1980 117.1 9.1 5.7 63.1 1.75 76.1 10.0
1990 123.6 12.1 7.9 65.1 1.54 78.9 10.5
2000 126.9 17.4 11.8 66.3 1.36 81.2 15.3
2010 128.1 23.0 16.6 68.0 1.39 83.0 21.8
2014 127.1 26.0 18.8 68.5 1.42 83.7 23.0 b 7.3 b 11.4 b 1.8 b
2025 120.7 30.3 24.5 69.4 1.33 84.8 24.4
2050 97.1 38.8 32.0 70.9 1.35 86.9
Note: a) Threshold age mean s th at the pr oportio n of t hose wh o ar e at thi s age or o ver i s 20 p ercent o f th e tot al pop ulation und er the s table p opulation
at the Lif e Tabl e of each year; b) 2012; c) Social secu ri ty b enefi ts in 20 25 ar e based on MHLW (2 012 ). Source: IPSS (2012) and IPSS (2014). Minis-
try of Health, Labour and Welfare, Life Table each year.
may change with different fertility assumption, but Japan is already the front runner in coping with containing
expenditures which increase in line with population ageing. In order to contain public pension expenditure, clear
options are to raise the eligibility age further beyond 65 years old, to change the post-retirement indexation of
benefits, to improve the management of the assets held by the state pension funds in order to raise the rate of re-
turn, and finally to reduce the rate at which pension benefits accrue.
Normal pension age is 65 years old for the Basic Pension, but concerning the EPI it will be 65 in 2025 for
male and 2030 for female. Japan is lagged behind in increasing pension age in line with extension of life expec-
tancy. In this connection, we calculated a threshold age shown in Table 2. If we define the elderly as the oldest
20 percent of the population based on the stable population in the Life Tables, then the threshold age for the el-
derly was 59 years old in 1960, 68 .5 in 2014 and will be 71 years old in 2050. Therefore, it might be more re a-
sonable to increase pension age from 65 to 69 rather soon. Indeed, new ageing rate (the proportion of those aged
70 or over to the total population) will be 32 percent in 2050, which makes public pension reform more feasible.
More significant reform of the public pension system in Japan is to reduce the extent of the inter -generational
differences in the internal rate of return from the system that occurs in the current pay-as-you-go system. This
could be accomplished partially by fixing the contribution rate over a long time. The tax treatment of pension
benefits should be aligned with that of income from employment. The social security system would become
more sustainable if the labor force participation of women and the elderly were to increase, and public pension
system should be more oriented contributing toward this direction.
2) Public healthcare system
Although Japanese healthcare expenditure as percent of GDP is low compared to the other developed coun-
tries, financing of healthcare system especially for the elderly is still a serious issue and many problems have
been revealed in healthcare delivery recently.
Japanese healthcare reforms in the 1990s featured the pursuit of quality (such as informed consent and pa-
tient’s choice) as well as cost-containment. It has been more focused on the sustainability of the system and pa-
tients-oriented healthcare in the 2000s and 2010s. The main reform issues in the Japanese healthcar e system are:
a) reorganization of health service delivery system; b) co-ordination between primary care and hospital care as
well as between healthcare and long-term care; c) quality assurance of health services and empowerment of pa-
Elderly tend to suffer from multiple chronic diseases and their functional ability tends to decrease with age.
Per capita healthcare expenditure for those who are 65 or over is 4 times than that for 0 - 6 4 age group (Figure
2), and elderly patients stay much longer in hospitals in Japan. As a result, 58 percent of the national health ex-
penditure is consumed by those who are aged 65 or over and 47 percent by those who are aged 70 or over in
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Figure 2. Per capita healthcare expenditure and elderly LTC expenditure as percent of per cap ita GD P by age g rou p i n Japa n:
2013. Source: author’s calculation based on the data from Ministry of Health, Labor and Welfare.
2013 [3]. The focuses of reforming the healthcare system for the elderly are always a) coordination between
healthcare services and long-term care services and b) elimination of inappropr ia te long-term hospitalization.
A new insurance scheme for those over the age of 75, introduced in 2008, together with policies to reduce the
demand for healthcare by preventing lifestyle-related diseases are expected to help keep healthcare expenditure
stable. However, per capita healthcare expenditure for 85 years old or over is increasing again in recent years,
and public health insurance will have to be trimmed further due to financial constraints. Japanese health insur-
ance in general has so far paid relativ ely little attention to preventive care. However, in view of the importan ce
of lifestyle-related diseases, prevention has become one of the main issues in recent healthcare reforms.
3) Long-term care system
The principles of Japanese LTC Insurance are universality of coverage (although benefits are available mainly
for the elderly), financing through social insurance (although the public fund finances 45 percent of the cost),
freedom of choice by service users, and reliance on a service market.
The existence of so-called “bedridden elderly” has been a peculiar phenomenon in Japan. There had been
frequent use of hospital beds instead of long-term care facilities in Japan, because: a) the accessibility to the lat-
ter was limited, and b) the medically oriented services were readily accessible to the elderly [2]. However, after
the implementation of the LTC insurance, the number of so-called socially induced hospitalization cases espe-
cially among elderly patien ts has been reduced, although not totally eliminated.
There is still a significant shortage of institutional care services, and it is necessary to encourage the devel-
opment of a private market of the LTC providers especially for institutional care. It is quite natural from the
consumers’ point of view to demand coordination between healthcare and LTC services. However, there is some
strong concern that the system will be dominated by a medical model with individuals who are not familiar with
the LTC.
Healthcare expenditure for the elderly (those who are 65 years old or over) is about 3 times larger than elderly
LTC expenditure. However, Figure 2 clearly shows that restricting to those who are 90 years old or over, LTC
expenditure is larger than healthcare expenditure.
4. Discussion
Although the 2004 pension reform was a large scale reform, setting upper ceiling of the contribution rate and in-
Age group
Healthcare expen ditu r e
Elderly LTC exp enditur e
T otal
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troducing a mechanism (Note 3) adjusting beneficiary-contributor imbalance. However, many problems still
remain unsolved. Japanese public pension system needs to be less vulnerable to economic and demographic
changes. Introduction of individual retirement account, for example, may be useful towards this purpose. How-
ever, reform principles are not yet reached to a broad national consensus. The most important factors for the
sustainability of the public p ens ion system are fairness of the system and public trust to the s ys tem.
People’s preference for equality is strong in Japan especially for healthcare services. The right incentive
structure is crucial for the sustainable development of the healthcare system. The reform of the reimbursement
system is especially important to place the right incentives in the system. The key to achieving higher quality
and greater efficiency in healthcare, as well as in long-term nursing care, is to make greater use of the dynamism
of the private sector, in part by allowing companies to manage hospitals and nursing homes [4]. Towards this
end, prevention and the empowerment of patients are gaining importance in Japan. Priority has been given so far
to cure rather than prevention and to equal access to services in Japanese healthcare delivery, but the need to
balance patients’ freedom and cost containment makes it necessary to consider the so-called gate-keeping func-
tion of primary care physicians and to focus more on prevention of lifestyle-related diseases [5]. Prevention is
important not only for avert ing cost -push pressures to health expenditure but also for people’s quality of life [6].
As population is aging, how to provide LTC for the frail elderly is a mounting concern in the developed coun-
tries. The need for LTC is quite common among the very old. It is quite a remarkable event in Japan that the
provision of LTC has been changed from welfare and rationing services to needs-based insurance benefits. LTC
for the elderly is related not only to the dignity of the individual elderly but also to the “shape” of a society. As
LTC expendi t ure i s m ore s ensit i ve to t he agi ng of the population t han he althc a re e xpe ndi t ure a s seen in Figure 2, it
is indispensable to prevent and reduce the incidence of LTC as much as possible. Coordination between health-
care and LTC services is always a sticking problem. Financing of LTC services is still one of key issues, and in
this regard a new balance between solidarity and self-help is still important, because the cost of aged society will
never disappear in any case [2].
Financing of the social expenditure such as LTC benefit, family benefit, benefit for low income families and
benefit for handicapped is still one of the key issues in Japan, and new options have been reviewed, including
broadening the financing basis of social benefits, integration of public systems and private arrangements, and
redefinition of the elderly. Under the circumstances of trimming public programs, curtailment o f fringe benefits
by company, and enlargement of individual responsibility, new forms of solidarity including a fair share of con-
tribution by the eld erly is indispensable. Concerning a redefinition of the elderly, Japanese experience provides
an interesting example. In view of threshold ages shown in Table 2, a cautious approach has been taken in in-
troducing a healthcare program for the elderly, but extension of pension age is very slow and lagged behind
compared to the other developed countries. Even if the burden on social security (tax, contribution, and utility
charge) is reduced, curtailed social protection should be complemented by individual efforts, becaus e the cos t of
old age will not disappear. In reducing the generosity of aging-related programs, a balanced reform is needed:
spread the cost of reform equitably acros s generations; improve the willin gness to save for retirement; and con-
sider the impact of reform on low-income households [7].
Solidarity between p atients and non-patients remains the same, but solidarity between young and old may be
changing [6]. Whether to attach importance on solidarity or on self-help is not a matter of choic e but a matter of
weight. As Japan is already a front runner in coping with containing age-related social expenditure, new forms
of solidarity are indispensable to make Japanese social security system sustainable. If people pay more attention
to lifestyle-related diseases and refrain from over-use of healthcare services, then healthcare system may escape
from too heavy pressure and contribution rate may remain stable. If people have independent spirit and not easi-
ly use LTC services, then LTC expenditure may not increase too much. If public pension system does not leave
low earning workers behind, then public assistance may avoid steep increase in the number of applicants even-
tually. Each country gropes for a better balance between solidarity and individual responsibility, but there is so
far no nati ona l conse nsus on thi s iss ue in Japan [8].
We discussed structural issues in the Japanese social security system, which will provide the basis for con-
taining social expenditure in Japan. The followings are summary of our discussion:
Ageing of the population is and will be very severe in Japan. However, future fertility rate may change ac-
cording to policy and environment, and social support for child-rearing shoul d be do ne more seri o us l y;
Other than family benefit, benefits fo r low income families and handicapped as well as LTC benef it need to
be increased, which of course require additional resources. Future public pension benefit is anticipated to be
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stable, but it is not certain because of political power of the elderly;
For healthcare and LTC services, it is especially i mportant to incorporate right incentives in the system; and
New forms of solidarity, including fair share of burden among generations, are indispensable in order to
make Japanese social security system sustainab le.
5. Conclusion
The environments of Japanese social security system will change significantly if fertility rate will increase and
threshold age for the elderly will be increased. However, further structural reforms are still necessary, and new
forms of solidarity are indispensable to make Japanese social secur ity sys tem sustainable.
(Note 1) Benefit packages do not allow the mixed use of listed items in the Medical Fee Schedule and non-
listed items in Japan. For example, whenever advanced technology that is not covered by health insurance is ap-
plied, the total costs are treated as ineligible for insurance coverage. This is called the prohibition of mixed use.
However, under the high-cost relief scheme, if a patient receives certain high-technology treat ments in specially
approved medical facilities, the basic part corresponding to the listed conventional health service is covered by
the insura nc e , and the pa t ient should pay the ba lance.
(Note 2) Social expenditure in the USA was modified as if there were a public health insurance covering most
of the population, like most other developed countries.
(Note 3) This mechanism is called “macro economy slide (indexation of benefit)”.
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[4] OECD (2006) OECD Economic Surveys 2006 Japan.
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[6] Fukawa, T. (2007) Macro Evaluation of the Japanese Healthcare System in Comparison with Germany. The Japanese
Journal of Social Security Policy, 6, 31-42.
[7] OECD (2003) Policies for an Ageing Society: Recent Measures and Areas for Future Reform. Economics Department
Working Paper No.369.
[8] Oshio, T., Tajika, E. and Fukawa, T. (2014) Social Security Policies in Japan: Issues and Challenges. University of
Tokyo Pre s s, Toky o. (In Japanese)