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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