Population ageing started taking place in most of the industrialised countries during the
twentieth century, and reached high levels over time. In
1950, the majority of countries had less than 11% of their population aged 65 and over; in 2000 the highest figure was 18%, but
studies show that by 2050 it could climb up to 38%. The main reasons why the share of elderly has increased over time are
high life expectancy and
low fertility rates, that lead to a continuous
increase in dependency ratios. In other words, as the mean age of population increases, the share of elderly population that needs to be financially cared for increases, too.
The age structure of a population has important economic consequences because the working-age population has to
generate sufficient resources in order to provide for its own material needs, fund transfers to children and the elderly, and finance its own future retirement needs. The phenomenon of population ageing seems therefore to challenge the certainty of meeting these social and economic responsibilities, and unfortunately, the solutions remain uncertain.
As a consequence of changes in both fertility and mortality figures, the age structure of the Japanese population has been shifting, making
Japan’s population one of the oldest in the world. The share of the population aged 65 and over increased
from 4.9% in 1950 to 20.2% in 2005, to
28.0% in 2019, and it is projected to reach almost
38.0% by 2050.
After the 1947-1949 baby boom,
Japan’s total fertility rate (TFR) halved from 4.54 to 2.04 children per woman over a relatively short period of time (
1947-1957). This resulted in a shift in personal resource allocation that eventually led to a rapid accumulation of physical capital in the 1950s, and to Japan’s economic growth in the 1960s. However, after the first oil crisis in 1973, Japan’s economic growth slowed down, and Japan’s fertility rates started decreasing again. The TFR declined below 1.5 children per woman in the mid-1990s, to
1.26 in 2005, and it slightly rebounded to
1.4 in 2018. Yet, it is not enough to look at the fertility rates over time, but also at the mortality transitions over the past years. In 1960,
Japan’s life expectancy at birth was 65.3 years for men and 70.2 years for women, but it became one of the highest among OECD members, male life expectancy at birth reaching
81.2 years and female life expectancy
87.3 years in 2018.
Moreover, shifting from being a net consumer to being a net producer appears to have increased from 24 years during 1984-1989 to 25 years in 1994 and to 26 years during 1999-2004. On the other hand, the transition from being a net producer to being a net consumer was only slightly postponed from 58 years over the period 1984–89 to 59 over the period 1994–2004. This means that the average period of
financial self-sufficiency is relatively short if compared to the average life span.
As the main purpose of the welfare state is to establish systems which allow
sustainable transfers of wealth between individuals, the phenomenon of population ageing does represent a threat to the existing Japanese welfare system, as it implies further major challenges in financing pensions, elderly care, and healthcare. If we look at the conventional old-age dependency ratio (OADR), data shows that Japan had the highest OADR in the world in 2019, with 51 persons aged 65 years or over per 100 persons aged 20 to 64 years. What is alarming is that projections indicate that by 2050 Japan will keep its position as the country with the highest OADR, but this time with
81 old-age dependents per 100 persons of working age.
As for the pension system, low fertility rates, combined with growing life expectancy, will have an increasingly higher impact on the old-age dependency ratio, that in turn will affect the public pension schemes. Japan established universal pension schemes in 1961 and they were first organised on the principle of reserve financing, but it later shifted toward a
pay-as-you-go system. This kind of pension system implies that ‘
today’s workers’ contributions are used for benefits for today’s pensioners’, however, its biggest vulnerability is indeed population ageing. For instance, if a couple lives until 95 years old, they will need around
¥20 million more than the amount their pension allowances are supposed to provide.
The main implication of population ageing on the healthcare system is that there is an increase in public health consumption towards older ages. An increase in life expectancy, therefore, could be associated with higher net transfers received by the elderly because of the public health programs. In other words, population ageing increases healthcare costs. In Japan
health expenditure reached 10.9% of GDP in 2018, however, it is projected to reach 12.1% by 2030. Japan has also high availability of hospital beds, 13.1 per 1000 people (OECD average: 4.7), and high average length of stay: 16.2 days (OECD average: 7.7).
There are different solutions that might be seen as viable to ameliorating the negative economic implications of population ageing. However, no solution taken alone seems to be fully efficient.
Increasing fertility, for example, may work in the long run, but as parents tend to reduce their supply of market labor over a 25-30 years period, until children start working, it would only reduce hours worked even more and increase the dependency ratio.
Increasing productivity per worker could be another solution, However, it is only partially helpful because of the
Baumol’s cost disease, which would lead to increasing the overall consumption more than the production. Other solutions are related to
increasing the labor force participation. This can be done by increasing the retirement age, by
shortening the education period, or by reintegrating people with disabilities into employment, as it would lower public spending on
disability benefits.
Immigration could also be a viable solution to increase the labor force participation, however, it might work only to a limited extent. In reality, assuming that people migrate at young ages, immigration lowers population ageing only temporarily because migrants get older too. It creates a snowball effect that would eventually translate in constantly increasing healthcare and pension costs. However, considering Japan’s demographic crisis, an immediate increase in labour market participation seems to be necessary, especially in
‘labor-intensive’ sectors, where low-status
3K jobs that are not appealing to the native population, might represent a good opportunity for people coming from developing countries in South-East Asia. Even so, immigration in Japan still faces many obstacles that are caused by the state’s failure to enact efficient policies, and to
‘reform the immigration system toward openness, equality and inclusiveness’. One other solution to increase the labour force participation would be increasing the share of women of working age that are active in the labour force. However, this option seems to be challenged by Japan’s strong cultural norms.
Women’s participation in the labour market is consistently lower than men’s employment rate, and the gender wage gap remains considerably high. One possible reason is that women are usually
socially constrained to give up on work to care for children. Reducing gender inequality first in society and then in the workplace would lead to increased workforce as well as increased natality.
Overall, there is no doubt that population ageing is a major factor of concern in most developed countries. As for the pension system, the constantly increasing old-age dependency ratio challenges the well-functioning of public pension schemes. The impact on the healthcare system is that the increasing share of the old-age population increases health expenditure. The labour market system is also challenged as the increasing and fast shift from working ages to retirement ages causes declining labour market participation. In terms of solutions, increasing fertility, productivity per worker, or labor force participation could be possible alternatives, however, they all seem to only partially work. The most viable way of dealing with the phenomenon of population ageing is, after all,
applying a combination of these solutions and not single measures.
