David A. Wise

Yukio Noguchi

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau
of Economic Research
Volume Title: Aging in the United States and Japan: Economic Trends
Volume Author/Editor: Yukio Noguchi and David A. Wise, eds.
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-59018-6
Volume URL: http://www.nber.org/books/nogu94-1
Conference Date: September 8-9, 1989
Publication Date: January 1994
Chapter Title: Introduction to "Aging in the United States and Japan: Economic
Trends"
Chapter Author: Yukio Noguchi, David A. Wise
Chapter URL: http://www.nber.org/chapters/c8039
Chapter pages in book: (p. 1 - 6)Introduction 
Yukio Noguchi and David A. Wise 
The papers in this volume were presented at the first of a series of conferences 
sponsored  jointly by the National Bureau of Economic Research and the Japan 
Center for Economic Research. Subsequent conferences were held on housing 
markets in the United States and Japan and on the economics of the family, 
and the related conference volumes are in preparation. The purpose of the con- 
tinuing series of conferences is to explore issues that are of concern both in the 
United States and in Japan. Because population aging poses issues that are of 
paramount concern in both countries, that topic was chosen to begin the confer- 
ence series. It is hoped that, as the series progresses, the interaction will pro- 
mote increased mutual understanding of economic issues and economic behav- 
ior in the two countries and in addition will further economic research in the 
two countries. The goal of this conference was to present discussion papers by 
Japanese and American authors on comparable topics. The volume contains 
papers on labor force participation and retirement, the economic status and 
housing of  the elderly, the budget implications of population aging, and the 
utilization of health care. The discussion of health care in this volume is limited 
to the United States, but that issue will be the subject of a separate  joint confer- 
ence to be held in December 1994. 
Two general concerns are addressed in the papers: one is the economics of 
the aged, and the other is the economics of  aging. The first directs attention 
toward the present economic status of the elderly, and the second directs atten- 
tion toward changes that result from and issues that arise because of population 
aging. The two issues are of course closely related, and some aspects of both 
are considered in several of the papers. Indeed, studies of the economic status 
Yukio Noguchi is professor of  economics at Hitotsubashi University. David A. Wise is the John 
F.  Stambaugh Professor of Political Economy at  the  John  F.  Kennedy  School of Government, 
Harvard University, and area director for Health and Retirement Programs at the National Bureau 
of Economic Research. 
1 2  Yukio Noguchi and David A. Wise 
of the current elderly are in many cases motivated by the recognition that future 
population aging is likely to bring with it increased concern for the economic 
well-being of the aged. 
The Japanese population will age very rapidly in the coming decades. Ac- 
cording to the most recent prediction by the Institute of Population Problems 
of the Ministry of Welfare (September 1992), the proportion of people age 65 
and older is expected to rise from  12.1 percent in  1990 to 25.5 percent  in 
2020 and 26.0 percent in 2030. These figures are higher than the corresponding 
figures (23.6 percent in 2020) in the previous prediction (December 1986), on 
which most of  the discussions in the papers by Japanese authors are based. 
This raises a number of important public policy concerns. Labor force partici- 
pation, financing Social Security, housing the older population, and health care 
are of particular importance. 
Population aging will also proceed rapidly in the United States in the com- 
ing decades, although not as rapidly as in Japan, and the same issues are of 
major concern. According to the UN publication “World Population Prospects 
1990,” the ratio of people age 65 and older in the United States is expected to 
reach 17.3 percent in 2020 and 19.6 percent in 2025. It is our hope that studies 
of the current situation of the elderly and major trends will help us understand 
what the future holds and will help inform public policies meant to address 
these issues. 
Current policy discussions are also affected by  future considerations. For 
example, the introduction of  the consumption tax, which had long been an 
important policy issue in Japan, was closely related to the aging problem be- 
cause its expected role was to finance increasing Social Security expenditures. 
Therefore, this issue cannot be judged  without analyzing population  aging. 
There are other examples in which present economic policies are related to the 
future aging process. Japan is now asked to adopt policies aimed at expanding 
domestic demand. Whether to adopt saving-reducing programs or investment- 
increasing programs depends on the future trend in macroeconomic balance, 
which is related to population aging. 
One of the benefits of the joint research conferences including both Ameri- 
can and Japanese participants is that comparisons between the two countries 
have become possible. We found that there are both similarities and differences 
in the nature of problems, behavioral patterns, institutional settings, and pub- 
lic policies. 
Trends in the labor force participation of older Americans and the primary 
explanations  for these  trends  are summarized by  Robin L. Lumsdaine and 
David A. Wise. They show that, while the labor force participation  rates of 
men age 60 and older remained essentially constant from 1870 through 1937, 
those rates then began to decline in  the late  1930s and that the fall is still 
continuing. They attribute the decline to the introduction of  Social Security 
and private pension plans. They emphasize that, for the majority of retirees, 
support after retirement is provided primarily by  Social Security and private 3  Introduction 
pension plans. Most older Americans have very little personal saving. Personal 
wealth is primarily in the form of housing equity, and housing equity tends not 
to be converted to liquid assets, as the elderly age. They argue not only that 
the income from Social Security and firm pension plans allows elderly employ- 
ees to retire at younger and younger ages but also that the provisions of  both 
Social Security and firm pension plans tend to encourage early retirement. In 
short, they conclude, although persons are living longer and longer, they are 
leaving the labor force at younger and younger ages. The trend is unrelated to 
personal saving; it is associated instead with government promises of  Social 
Security benefits after retirement and the saving by employers for their employ- 
ees through firm pension plans. 
The effect of government pensions on the labor supply of older Japanese is 
analyzed by  Atsushi Seike and Haruo Shimada. As in the United States, the 
labor force participation of  older Japanese is also declining. Still, Japanese 
labor force participation rates are about twice as high as comparable rates in 
the United States. For men over 65, for example, the participation rate is 37 
percent in Japan, compared with  17 percent in the United States. Seike and 
Shimada’s analysis, however, concludes that the government pension plan for 
employees contributes significantly to the withdrawal of older employees from 
the labor force. Seike and Shimada conclude that the Japanese plan earnings 
test, similar to the U.S. Social Security earnings test, reduces substantially the 
labor supply of those who are receiving retirement benefits. They tend to re- 
duce their labor supply to avoid the lump-sum tax associated with the earnings 
test in Japan. 
Michael D. Hurd surveys research on the economic status of the elderly in 
the United States. He concludes that the elderly are at least as well off as the 
nonelderly and possibly substantially better off. In addition, because much of 
the income of the elderly, like Social Security, is indexed to inflation, they are 
well protected from inflation. In the relatively near future, the economic status 
of the currently retired elderly seems well assured, according to Hurd. In the 
more distant future, however, when the baby boom generation retires and there 
are many more retirees per employed person, the financial position of  the el- 
derly is much less bright. He suggests that the consumption of the elderly rela- 
tive to the consumption of employed persons will then be lower than it is today. 
Noriyuki Takayama considers household asset- and wealthholdings in Japan. 
He concludes that, in terms of  wealthholding, the elderly are better off than 
the working-age population. Owing to the rapid rise in the value of Japanese 
land prices, the difference between the wealth of the old and the wealth of the 
young has widened. As in the United States, housing equity is the major asset 
of most elderly households. Takayama emphasizes that, under the current cir- 
cumstances, a young person who works all his life will still be unable to buy a 
home in a Tokyo suburb if he has to depend on his own earnings. Takayama 
also points to the need of  older Japanese to liquidate home assets by  using 
equity conversion schemes such as reverse annuity mortgages. 4  Yukio Noguchi and David A. Wise 
Daniel L. McFadden considers the economic issues of housing the elderly 
in the United States. He finds that the share of income spent on shelter rises 
with age, primarily because income falls more rapidly than payments for hous- 
ing, but also because real housing prices increased substantially at the end of 
the  1970s. This supports the common perception  that the elderly are being 
squeezed by housing costs. On the other hand, McFadden argues that the pat- 
tern of mobility among the elderly and the housing transactions when the el- 
derly move do not suggest a significant  “bottled-up’’ demand for converting 
housing equity to income. There appear to be no major market barriers that 
prevent the elderly from making desired transactions between nonliquid  and 
liquid assets. McFadden  also suggests that the demographics of  the elderly 
population in the United States and the age distribution of capital gains from 
housing price increases suggest that the baby boom generation will face more 
difficult economic circumstances at the end of its life cycle than the previous 
generation. 
Seiritsu Ogura discusses the budget implications of population aging in Ja- 
pan, with an emphasis on health care and the cost of public retirement benefits. 
As in the United States, public health insurance in Japan provides health care 
to the elderly at little or no cost. Apparently as a consequence, the per capita 
cost of health care for the elderly has risen very precipitously in recent years. 
Nonetheless, health care cost in Japan is only about 6 percent of GNP, approxi- 
mately half the cost in the United States. 
In  1973, benefits under the Japanese public pension plans were increased 
substantially,  and  subsequent  costs  increased  very  rapidly.  According  to 
Ogura’s analysis, the cost of both health insurance and pension plans will con- 
tinue to increase sharply in the next several decades and will peak around the 
year 2021, when the cost of government medical programs will be about 50 
percent higher than it is today and the cost of public pension plans will double. 
Together, the two  plans  will  absorb  about  one-quarter  of  national  income, 
about  10  percentage  points  more  than  the  current  cost.  Ogura  questions 
whether future generations of workers will be willing to continue to support 
the elderly at the levels at which they have been supported in the recent past. 
Alan M. Garber surveys demographic trends that influence the utilization of 
health  care in the United  States and examines the key  financial issues sur- 
rounding hospital and physicians’  services for the elderly. He also discusses 
the obstacles to improved financing and delivery of long-term care. He urges a 
cautious approach to expanded government financing of  long-term care, em- 
phasizing the difficulty of controlling costs for such care. Garber argues that 
marketing long-term  care insurance to younger persons  should help prevent 
the adverse selection that mitigates against selling long-term care insurance to 
elderly  persons.  Nonetheless,  owing to the  open-ended  nature  of  potential 
long-term care services, he argues that moral hazard will remain an obstacle 
to the efficient functioning of  a long-term care insurance market. As larger 
numbers  of  people purchase  long-term  care insurance,  nursing  homes  are 5  Introduction 
likely to change their character, providing high-quality  housing  and related 
services, Garber emphasizes. Many individuals who would not consider enter- 
ing a nursing home today would be willing to do so if quality improved in this 
sense. Garber concludes that the development of private financing mechanisms 
is likely to be the major response to the need for long-term care. 
In summary, taken together, the papers in this volume reveal a striking num- 
ber of similarities between the two countries. The populations in both countries 
are aging rapidly, although the rate is faster in Japan than in the United States. 
Thus, true “aging problems” are future problems in both countries. Workers 
are leaving the labor force at younger and younger ages in both countries, al- 
though the trend is much more pronounced in the United States than in Japan. 
In both countries, the trend may be attributed in large part to public and private 
pension benefits. Public health insurance that provides health care at little or 
no cost in both countries contributed to rapid increases in the cost of  health 
care in both Japan and the United States, although the per capita cost in Japan 
is still only about half that in the United States. Housing equity is the primary 
asset of  both elderly Americans and elderly Japanese. In both countries, the 
elderly are at least as well off as younger members of the population. Although 
Japan’s national saving rate is much higher than that in the United States, both 
Japanese and American authors predict that population aging will reduce fu- 
ture saving rates in both countries, largely because of Social Security programs 
that have become more generous in recent years. Indeed, the Social Security 
programs in the two countries are rather similar. The cost of health care and, 
more generally, the prospect of a smaller number of employed persons support- 
ing a growing number of retired persons are important concerns in both coun- 
tries. 
There are of course some differences. For example, the ratio of elderly living 
together with their children is high in Japan and low in the United States, al- 
though the pattern in Japan is rapidly changing in the direction of the U.S. 
pattern. A special feature of the Japanese economy is the extremely high real 
estate values, especially in urban areas. Although much of the increase during 
the late 1980s was due to “bubbles” and real estate prices are falling dramati- 
cally in recent years, the values are still considerably higher than in other coun- 
tries, and homes are the major form of household assets. Since a large fraction 
of homes are owned by the elderly, this has had an extremely important effect 
on the wealth of the older population in Japan. The medical care systems are 
very different in the two countries, although those differences are not empha- 
sized in this volume. This Page Intentionally Left Blank

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