As the Japanese population structure changes, health care and long-term care
costs will steadily increase. The current style of financing (pay-as-you-go) will create a
large increase in future burden of these costs. This paper studies an alternative policy
that prefunds the social insurance benefits for the elderly.
During a transition process, the proposed scheme maintains a higher contribution
rate in order to accumulate sufficient funds. Under our baseline scenario, the sum of the
contribution rates toward health insurance and long-term care insurance increases from
5.06 percent of earnings to 12.41 percent of the same. The rate of increase in overall
burdens, including taxes and subsidies, is 63 percent.
Our sensitivity analysis has shown that the quantitative implications of the
increase in total burdens depend on social cost scenarios, the labor force, and the
interest rate. However, labor force scenarios do not have a considerable impact on the
rate of burden. As against this, the setting of social costs has a significant impact on the
same.
Even under the most optimistic scenario, the rate of increase in total burden is 34
percent. Even though we cannot predict the exact amount of the necessary contribution
rate that is capable enough to transfer the funded system, what we are sure of is that a
significant increase in the contribution rate is inevitable.
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