10 Challenges in Creating a Cohesive System for Health Care, Pensions, and the Needs of the Elderly

Keimeir Kaizuka, and Anne Krueger
Published Date:
July 2006
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Keimei Kaizuka


This chapter describes the current situation in the Japanese welfare system as regards the needs of the elderly. It points out outstanding problems and hopefully suggests solutions to cope with a rapidly aging society. Prospects for the Japanese welfare system appear dim if we consider Japan’s severe demographic conditions with its very low birth rate and low death rate.

The contemporary welfare systems of developed countries find their roots in the Beveridge scheme adopted during World War II in Britain, although that scheme has been extended from flat rate contributions and fixed benefits to multiple rate contributions and supplementary benefits.

A brief overview of the Japanese system

The social welfare system in Japan is still in the tradition of the Beveridge Report, which designed a system composed of specific types of social insurance such as medical insurance, unemployment insurance, workman’s accident insurance, and pensions. The benefits are financed by contributions or premiums from both employees and the employer, with part of the benefits sometimes coming from general tax revenues. From an economist’s point of view, these formal burdens prescribed by law do not necessarily show the final incidence of the burden. A typical case may be the payroll tax in the United States.

In order to describe the Japanese system in more detail, we will briefly review its history, and explain the typology of social welfare systems in developed economies. Then we can assess the Japanese system in comparison with other economies.

The establishment of the Japanese system

Since the end of World War II, the dominant form of social welfare has been a system of specific types of social insurance. The first example of social insurance was the medical insurance proposed by Prussian Chancellor Otto von Bismark (1883). Social welfare in European countries has consisted of medical insurance, workman’s accident insurance, public pension insurance, and unemployment insurance, and has been in place since before World War II. In the United States, the establishment of a social welfare system seems to have been delayed mainly because of the unfavorable attitude towards social welfare in the American way of thinking. Social welfare legislation was enacted in the New Deal period, and even now a comprehensive health care system has not been adopted. In the case of Japan, most types of social insurance were initiated during the occupation period after World War II under the influence of the liberal line of the New Deal. In other words, there was no initiative from the Japanese side for social reform, and the plan for social programs developed along the lines of the Beveridge Report.

Medical insurance

Medical insurance started in 1929, during a period after World War I when Japanese society began to show some political instability. The “carrot and stick” approach is evident in the establishment of the medical insurance system, as had been the case with Bismark in Prussia. From 1961 on, medical insurance developed into a comprehensive system in the sense that every member is covered by insurance, although the benefit level is different across groups. In the typical case of Japanese social insurance, the two main groups are employees and self-employed persons. The former group includes workers employed by private companies and the government, and the latter group includes agricultural producers and small businesses. The benefit level for employees was originally higher than for self-employed persons, and the way of financing the insurance was different; namely, for employees the premium was set at a fixed percentage of wages, and for the self-employed the premium included a lump-sum component. Medical insurance for the aged (originally, those over 65 years of age) was financed by contributions from other forms of medical insurance. How to finance benefits for aged persons has been the focal point of discussions on medical insurance.

Public pensions

Public pensions became comprehensive in 1961, as was the case with medical insurance, and the system has been composed of three parts, namely as regards employees of private companies, employees of the government, and self-employed persons. The system was changed in 1986, and the change has important implications for the future course of reform for public pensions.

Before 1986, public pensions had been earnings-related, like social security in the U.S. and most public pensions in other countries. Now our pension is composed of a basic pension and supplementary benefits. In the basic pension, the level of monthly benefits is ¥132,000 for a couple and benefits are financed by contributions from the employer and employee and also general tax revenues (one-third of the total payment at present). Self-employed persons and widows receive a basic pension, so this pension sets the minimum level of benefits for qualified members. Usually, an employee receives the sum of a basic pension and an earnings-related pension (about ¥180,000 for a couple). Considering the present structure of benefits and the method of financing, we cannot say that the Japanese system is based on social insurance principles; the system is a hybrid system.

Unemployment insurance

In the period of high-growth economy (until the 1980s), we paid no attention to the problem of unemployment insurance. The issue of the qualifying period for recipients of the benefits (typically young women after marriage) is the main one, and we shortened the period of receiving the benefit. However, from the 1990s, due to the long economic slump, the problem of unemployment has been a serious issue, and the unemployment insurance account has shown a continuous deficit. How to cope with the problem of the unemployed who lose their qualification to receive benefits because of long periods of unemployment has gained prominence in the policy debate.

Insurance for nursing care for the elderly

Insurance for nursing care for the aged was established five years ago, and is a unique system in the sense that almost no other country besides Germany has adopted it. We will explain the system in detail because of its novelty and its implications for Japan’s aging society.

In order to understand the role of insurance we need to look at the social background of the family. Traditionally, Japanese society has believed that the aged should be cared for by their family. In the past (probably until the 1970s), the three-generation family has been dominant and the elderly were cared for within the family. However, the situation has changed because of the increase in aging of the population and also the diminishing role of the family. Today, people in their eighties are supposed to be looked after by their children, who are already in their sixties. The kind of support needed may be physically impossible. Even now the situation known as “the hell of nursing care” is not so rare. Five years ago, the situation became serious and the burden of care has often fallen on the women in the family. In Western countries, as I understand it, the three-generation family is rare, and nursing care seems to be partly supplied by family members who live in the neighborhood, with some aged people living in nursing homes. We have had nursing homes supported by the national government in the past, but the number of applicants for these homes was far beyond the capacity, especially in urban areas.

Insurance for nursing care for the elderly was originally intended to improve the situation of nursing care within the family through a new system administered by cities, towns and villages. The system brings together three groups, namely suppliers (various types of nursing homes), qualified aged people, and local governments. The problem with the system is how to adequately screen for the needs of aged people. The present system specifies six classes of needs for nursing care, and the care manager as a neutral agent manages the screening process for the service user’s needs. The problem of screening has been experienced also in the case of medical insurance where the receipt of a doctor’s services needs to be screened. In the case of medical insurance, the Federation of Medical Insurance set up a committee for screening. However, for insurance for nursing care, we could not easily find a suitable institution to do the screening and we could not easily specify the objectively defined class of standard coverage. As for the financing of insurance for nursing care, half of the cost is financed by participants in the insurance scheme and half by local governments (chiefly by cities, towns, and villages). Insurance premiums are paid by persons over 40 years of age.

The insurance has succeeded in achieving its original purpose. However, the insurance has been too successful, and the total expenditure has grown by 40 percent per annum during the four years since its inception. Tightening expenditure is vital if the system is to be sustainable. We come back to this problem later in this chapter.

International comparisons

There is a substantial number of papers on the typology of welfare systems in the context of international comparisons, especially with regard to the welfare state. Here, in order to clarify the position of the Japanese system relative to other developed economies, we explain a few typologies.

The first typology contrasts social-insurance-based countries and public-assistance-based countries. As we have already said, most developed countries have been influenced by the Beveridge Report, therefore it is possible to say that most countries have adopted a social-insurance-based system. A few countries adopted a traditional public-assistance-based system. The continental European countries, Anglo-American countries and Japan adopted a social-insurance-based system, while Australia and New Zealand adopted a public-assistance-based system.

The second typology refers to social-insurance-based countries, and distinguishes cash-benefit-oriented countries and social-service-oriented countries. Germany, France, and Italy are included in the cash-benefit-oriented countries and the Nordic countries are included in the social-service-oriented countries. Japan could be classified as a cash benefit country, although the service component is sometimes important in the case of insurance for nursing care for the aged. The Anglo-American case differs from these countries because the role of the private sector is important. U.K. pensions have been basically occupational private pensions and in the U.S. there is no comprehensive medical insurance, and private insurance is dominant. In fact, the Anglo-American countries traditionally did not favor the welfare system and the Beveridge Report was seen as a political tool by the Conservative Party in Britain to soothe the working classes and win the war against Nazi Germany.

Several features of the Japanese system

The Japanese welfare system has several features related to the problems which confront the system at present. Three deserve particular attention:

  1. The Japanese system has been designed as a comprehensive one. The pension system and medical insurance aimed to achieve this goal. For example, in the case of public pensions, the system is supposed to be broad in coverage, including single persons and small businesses. Even the German system excludes small businesses in public pensions. The question of whether comprehensiveness is really satisfied or not is a major issue in the Japanese policy debate.

  2. There is no institutional connection between tax administration and social security administration in Japan. Tax revenues are administered by the national tax administration (Internal Revenue Service) and contributions to the social welfare system are administered by the Ministry of Welfare and Labor. The level of compliance is different in the two cases, and usually the administration of tax revenues is regarded as more efficient than the administration of revenues for social welfare. The situation may be different in the U.S., where the system of payroll taxes works very efficiently. This point is related to the comprehensiveness of the public pension system in Japan.

  3. The separation of young persons (or employed persons) and the elderly is evident in the case of Japan, and seems to accentuate the conflict between young and old. Insurance for nursing care for the aged is a case in point. Now the system is financed by people over the age of 40, and recently the government attempted to extend the scope of contributors to those over the age of 25, but failed to do so. Medical insurance is another case where the separation has been argued for a long time, but the issue has not yet been settled.

Recent developments with public pensions

In 2004, the government proposed a new plan for public pensions. The debate on reform has, however, been diverted from the main structure of the new proposal for pensions to discussions of a scheme for Diet members, who are treated very favorably with high benefits and a low level of contribution. This dispute influenced the results of the elections for the House of Councilors: the coalition party of Liberal Democrats, and the Komei Party lost seats in the Lower House. After the election, the issue of public pensions has assumed a political character. However, in this chapter, the issue of public pensions is treated in the context of the functioning of the social welfare system.

New ways of reforming pensions

For many years, reform of the public pension system has not been successful in the sense that the way that the reforms have been presented has been awkward and they have failed to gain the confidence of the general public. The reforms were usually based on projections of birth and death rates for periods of five years. The projections turned out to overestimate the birth and death rates. As a result, estimations of pensions benefits have been optimistic and the burden of contributions has not been very high. Reform has been proposed in intervals of five years, and all the proposals have been revised based on more pessimistic projections. The general public feel that they have been betrayed and confidence in the public pension system has deteriorated.

The new scheme changes the way the reforms are presented and also the reliance on demographic assumptions has diminished.

The reformed system

The 2004 reform fixes the level of contributions through to the year 2038, and maintains the rate thereafter. The level of benefit is adjusted to reflect the decrease in the working population and the decrease in the death rate. Therefore the effects of increases in the wage rate have been limited by an adjustment factor and reflected in a modest raise in the benefit levels. The proposal is rather complex and is not easy to understand. However, it has the merit of taking into account prospective demographic trends and adjusts the level of benefits downward accordingly.

Concluding remarks

There are many issues that need to be discussed. In particular, the policy debate ahead needs to deal with the following:

  1. the relationships between the different types of social insurance

  2. the role of public assistance

  3. how to evaluate the role of private pensions, especially occupational private pensions, and

  4. the level of benefits we can maintain for public pensions in the future.

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