Policy Options for Financing the Future Health and Long-term Care Costs in Japan

Tadashi Fukui
Kyoto Sangyo University
Yasushi Iwamoto
University of Tokyo


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 and intergenerational inequity of burdens. This paper studies an alternative policy that pre-funds the benefits for the elderly.
During a transition process, the scheme keeps a higher contribution rate to accumulate enough funds. Under our baseline scenario, the sum of contribution rates of health insurance and long-term care insurance increases from 5.06 percent of earnings to 12.41 percent. The rate of increase in total burdens including taxes devoted for subsidies is 63 percent.
Our sensitivity analysis has shown that quantitative implications depend on the settings of social costs, the labor force, and the interest rate. The setting of labor force does not affect very much. The assumption of social costs has a significant impact.
Even under the most optimistic scenario, the rate of increase in total burdens is 34 percent. Although we cannot tell the exact number of necessary contribution rate that is able to transfer the funded system, what is sure is that the significant increase in contribution rate is needed.

JEL classification numbers: H55, I10
Keywords: social insurance; pre-funding; health insurance; long-term care; long-term care