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Aging in Japan
Michael Smitka
Washington and Lee University
October 2007
Context
• Rapidly aging society
– novel situation in known human history
– declining population due to low fertility novel too
• Japan in the vanguard
– it begs to be studied
• Important since Japan not unique
– Similar issues will affect US, EU, China, Korea,
parts of Southeast Asia, South Asia and Latin
America by 2050
© Michael Smitka 2007
Slide 1
Summary
• Fertility decline implies rapid aging
– Such fertility decline is “normal”
• It is primarily an economic, not a cultural issue
• Savings is not how retirement is financed
– Fallacy of composition: households save, economies can’t
• Savings is fundamentally “pay-go”
– For retirees to consume, current workers must consume less
• Market processes won’t accomplish that
• Tax-financed public pensions must play a role
– Other margins of adjustment help
• Utilization women, older workers, immigrants, foreign assets
• But will not happen automatically and aren’t enough
• Huge political issues pending
© Michael Smitka 2007
Slide 2
Old-age (65-) share of population
1990
2005
2020
2040
US
12%
12%
16%
20%
Australia
11%
13%
17%
23%
UK
16%
16%
19%
23%
France
14%
17%
21%
26%
Germany
15%
19%
22%
29%
Italy
15%
20%
24%
35%
Japan
12%
20%
29%
36%
© Michael Smitka 2007
Slide 3
Demographics of aging
• Populations change under cumulative
impact of fertility & mortality
• Mortality is falling: lots of 90-year olds
– See next chart
© Michael Smitka 2007
Slide 4
Mortality, 1930 and 2000 (
by
200
175
150
125
100
75
50
25
0
0- 4
5-9
10-14
15-19
© Michael Smitka 2007
20-24
25-29
30-34
1930M
35-39
40-44
2000M
45-49
50-54
W1930
55-59
60-64
W2000
65-69
70-74
75-79
Slide 5
80-84
Fertility is more important
• Population pyramids
– Normally have women on the right
• men on the distaff side
• When cycle across time, can see how age
structure interacts
• KEY: Population aging is due to rapid
decline in fertility
– not low fertility
© Michael Smitka 2007
Slide 6
© Michael Smitka 2007
Slide 7
© Michael Smitka 2007
Slide 8
© Michael Smitka 2007
Slide 9
© Michael Smitka 2007
Slide 10
© Michael Smitka 2007
Slide 11
© Michael Smitka 2007
Slide 12
© Michael Smitka 2007
Slide 13
© Michael Smitka 2007
Slide 14
© Michael Smitka 2007
Slide 15
© Michael Smitka 2007
Slide 16
© Michael Smitka 2007
Slide 17
© Michael Smitka 2007
Slide 18
Japan is “normal”
• Spain, Italy, Greece, Portugal
• In Asia:
– China, Korea
– Vietnam, Thailand, Malaysia
• even Indonesia
• Even southern India (esp. Kerala)
• But not Philippines, Laos, Cambodia
• US is an outlier
© Michael Smitka 2007
Slide 19
Total Fertility Rate in Japan and Southern Europe
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
© Michael Smitka 2007
Slide 20
Fertility in China
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Peng Xizhe, working paper, Hitotsubashi University, 2006
Fertility Transitions and its Socioeconomic Impacts in China
© Michael Smitka 2007
Slide 21
Fertility
• Claim: children are “inferior” good
– Demand falls as incomes rise, in contrast to
normal goods
– Can use standard cost/benefit framework
• Economic benefits of children now trivial
• Meanwhile costs have risen
– Accentuated by greater opportunities for women
• Consistent survey finding that men and
women want on average 2+ children in Japan
– But work and marriage patterns intervene
© Michael Smitka 2007
Slide 22
Mean age at first marriage
Greece
Italy
Portugal
Spain
Japan
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
© Michael Smitka 2007
Slide 23
© Michael Smitka 2007
Slide 24
Age-specific Fertility
0.3
0.25
0.15
0.1
0.05
© Michael Smitka 2007
1930
1950
1970
1980
1990
2001
Slide 25
49
47
45
43
41
39
37
35
33
31
29
27
25
23
21
19
17
0
15
Births per Woman
0.2
Completed Fertility by Cohort
children per woman
2.2
2.0
1.8
1.6
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
15
16
17
18
19
20
© Michael Smitka 2007
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
Slide 26
Cohort Fertility by Birth Year
0.26
0.24
0.22
0.20
0.18
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
© Michael Smitka 2007
Slide 27
Men vs Women
• LF participation
– Trends across time
– Trends by age
– Evidence (?) that may be changing
• Will flash data, not discuss
© Michael Smitka 2007
Slide 28
However…
• It’s already too late for fertility to stop aging
– Almost all Japanese who will be in the workforce
in 2030 have already been born
– Demographic momentum: few women of
childbearing age
• So even if fertility rises, impact muted until their children
reach childbearing age 40+ years from now
– As approach 2055 numbers can shift some
• But fundamental issue remains
• Only 1.3 Japanese age 15-64 for everyone who’s 65+
© Michael Smitka 2007
Slide 29
Age Composition of Population, 2006
65+ years
15-64 years
0-14 years
Dependents per worker
Elderly per worker
100%
1.00
90%
9%
9%
10%
12%
14%
16%
0.90
23%
30%
0.80
Share of Population
70%
0.70
60%
61%
50%
69%
68%
66%
60%
59%
58%
57%
54%
53%
52%
51%
0.60
64%
0.50
69%
69%
40%
67%
0.40
64%
59%
60%
30%
0.30
20%
10%
5%
7%
9%
12%
15%
17%
20%
23%
27%
29%
30%
32%
34%
36%
38%
40%
41%
0.20
0.10
0%
0.00
1940 1950 1960 1970 1980 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
© Michael Smitka 2007
Slide 30
Dependents per worker
80%
37%
How finance retirement?
• At household level, can save
– Buy bank deposits, a house, life insurance,
stocks & pension funds
– Live in house “mortgage free” and draw
down other assets
• THAT DOES NOT WORK FOR THE
ECONOMY AS A WHOLE
© Michael Smitka 2007
Slide 31
Fallacy of composition
• Japan’s economy is “closed”
– consumption is equal to domestic production
• Most consumption is of services (75+%)
• Only housing, furniture truly durable
• Retirees must consume out of current
production, not stored (saved) production
– Working agers must lower their consumption
– Will they voluntarily save 30%-40% to buy their
parents’ and grandparents’ assets?
• I think not! Current savings rate is 2% of GDP!!
© Michael Smitka 2007
Slide 32
Government must tax
• Voluntary savings for part
• Private pension funds a growth business in
Japan’s aging economy!
• Taxation necessary
– Savings equal dissavings only by chance
• Cf. classic macro paradox of thrift
• Equity: inequality within and across generations
– An additional 10% of GDP?
© Michael Smitka 2007
Slide 33
Margins of adjustment (1)
• Female labor force participation
– Job-place issues
– Taxation issues
• Difference is 15% within “M”
– Only for 30-45 bracket (15 yrs out of 40 or ≈ 40%)
– Women only 1/2 of potential LF
– So might add at most 1/2 x 40% x 15% = 3%
• In 25 years (2032) 20-65 pop down 15 mil
– Only 9.9 mil women age 30-45 so 15% = 1.5 mil
© Michael Smitka 2007
Slide 34
Education: High School, Jr College, 4-year College
Jr College Female
%
4-yr College Female
Post HS Male
Post HS Female
54
51
48
45
42
39
36
33
30
27
24
21
18
15
12
1980
81
82
83
84
85
© Michael Smitka 2007
86
87
88
89
1990
91
92
93
94
95
96
97
98
99
2000
01
02
03
04
Slide 35
05
2006
© Michael Smitka 2007
Slide 36
Female Participation by Cohort
data through 2005
75
70
65
Cohort
Years of
Birth
60
55
1946-50
1951-55
1956-60
1961-65
1966-70
1971-75
1976-80
50
45
40
35
30
25
20
15
15-19
20-24
© Michael Smitka 2007
25-29
30-34
35-39
40-44
45-49
50-54
55-59
Slide 37
© Michael Smitka 2007
Slide 38
Margins of Adjustment (2)
• Old-age labor force participation
– Retirement is a “normal” good?
• But those with education keep working, even in the US
– Financial necessity a driver
• Policy can push & pull too
– Delay in retirement age
– Treatment of taxes / payouts [Japan is OK…]
• In 25 years (2032) 20-65 pop down 15 mil
– Extending to age 65 adds 1.6 mil (3%)
– to age 69 adds 7.4 mil (12%)
• Shrinking retirees by 1.6 mil & 7.4 mil (-4.5% & -20%)
– An overestimate since half of 65-year-olds already work
© Michael Smitka 2007
Slide 39
© Michael Smitka 2007
Slide 40
© Michael Smitka 2007
Slide 41
Margins of adjustment (3)
• Immigration
– A big number
• Workforce falling 7.5 million during decade 2007-17
– Not impossible, cf. Spain, but big numbers
– But understates difficulty
• Immigrants also get married, have children
– Need 1.5 immigrants per immigrant worker
– And then retire
• Immigrants have lower productivity
– Language barrier, social barrier, credential barrier
– 4 immigrants equal 3 workers?
• Bottom line 15 million, not 7.5 million?
© Michael Smitka 2007
Slide 42
Margins of adjustment (4)
• Foreign savings
– Net foreign income now 2.5% of GDP
• And rising
– Allows workers to shift out of traded goods
• Into healthcare, other services
– Implies a trade deficit in the future
• But huge assets, so sustainable?
• Rising yen partially offsets benefits
© Michael Smitka 2007
Slide 43
Productivity:
Not a Margin of adjustment
• A bigger pie
• But still need to split it up
• Political economy
– Easier to raise taxes when an economy grows?
– But do elderly vote their interests?
– Maybe - and the young tend not to vote at all…
• Aging may lower productivity
• Less investment: profits when markets shrink?
• Less education: opportunity cost when wages flat?
– No suggestion to date that demand for education is falling
– Can teach old dogs new tricks?
© Michael Smitka 2007
Slide 44
Sum: Where there’s a will…
• Aging will require big shifts in what
government does
– Other margins of adjustment insufficient
– Taxation is contentious!
• Generation wars?
© Michael Smitka 2007
Slide 45
Needed research
– Sociology and anthropology of aging societies
• How to mobilize retiree power!
• How will the young react to providing for them?
– Humanities
• What will the old read? watch? Write & draw & tell?
– Lessons for healthcare provision
• Kaigo [介護保険] home healthcare - success story?
• Hospital-based healthcare - huge resource issues?
– Lessons from local government
• How to manage transition to ghost towns
– Politics: generation war?
© Michael Smitka 2007
Slide 46
Addenda
•
Corrections to “back of the envelope” calculations
– Adjusting the savings section to use age-specific savings rates. Working
age households surely save more than retirement age households
– Adding in capital income, which is surely larger for retirement age
households than for working age households
•
Neither should be large enough to change the fundamental picture
– Returns to capital are low, and net of investment and retained earnings
payouts to asset owners must be yet lower. But such income does serve to
lower the direct claims of those of working age on their own output.
– Working age savings rates remain low relative to the overall need for
transfers to retirees. Of course market transfers don’t help the significant
number of retirees who have few or no assets; if older workers don’t already
have a lot stashed away, they will have a hard time accumulating enough in
their final working years – and those with the fewest assets are also ones
least likely to receive the large one-time retirement bonuses many large
firms pay.
•
But I like to “dot my i’s and cross my t’s” or add jots and tittles.
© Michael Smitka 2007
Slide 47