Pension reform for an aging Japan: Welfare and demographic dynamics

Abstract

Japan’s life expectancy exceeds that of other developed countries; however, the standard starting age for receiving public pension benefits remains at 65 years. This paper uses an extended lifecycle general equilibrium model with endogenous fertility to investigate how a higher starting age for pension benefits affects individual welfare and future demographic dynamics. Our simulation analysis indicates that per-capita welfare will increase if the starting age for pension benefits is raised to 68 or 70. The higher the employment rate of individuals aged 65 and older, the higher are the per-capita welfare and the future population level. Conversely, if the employment rate for older adults remains at 52% (Japan’s current level), the total population would decrease in the long run compared with the benchmark case with a starting age of 65 for pension benefits. The findings demonstrate the importance of enhancing the employment rate of older adults while raising the standard pensionable age in Japan.