Selahattin Imrohoroglu

Japan leads advanced economies in terms of the speed and magnitude of demographic aging and has the highest debt to GDP ratio. Furthermore, public pension, medical and long-term care (LTC) expenditures are projected to far outpace revenues and create even more severe fiscal burdens. In this paper, we develop an accounting model populated with overlapping generations of individuals and incorporate social insurance programs in detail, use most recent estimates of Japanese micro data and government demographic projections to discipline the earnings and labor supply profiles of heterogeneous agents and their cohort shares, and simulate future paths of fiscal and macroeconomic indicators. Our numerical results suggest that absent any change in current policies, Japan will continue to run large pension, public health, LTC, and basic deficits and the debt to GDP ratio will continue to reach unprecedented highs, with growing interest payments. Although no single policy tool can address fiscal consolidation, a combination of policies is found to achieve sustainability: raise the retirement age to 67, cut pensions by 10%, raise copays of health and LTC insurances to at least 20% for all, and find policies to propel female employment and earnings and to narrow the gap with their male counterparts, and increase consumption tax rate to 15%. Under these changes, the debt to output ratio in 2050 would be lower than that in 2020.

Over the past two decades, Japan has suffered from low economic growth and a large and growing debt to output ratio. Furthermore, Japan anticipates significant increases in future government expenditures due to an aging population. These problems have led Japan to introduce a consumption tax rate in an attempt to raise revenues, and, more recently, to reduce the statutory corporate income tax rate to raise investment and output growth. In this paper
we study the growth and welfare consequences of a reduction in income taxation
in Japan along with increases in consumption taxation to stabilize the debt to output ratio. In particular, we
consider various unanticipated tax reforms using the model described in Hansen and Imrohoroglu (2016). We find that while output per working
age population is projected to be roughly constant between 2015 and 2021 in the benchmark equilibrium representing the status quo,
under alternative policies considered, output could be as much as 15% higher by 2021.

The labor force in Japan is projected to fall from 64 million in 2014 to 20 million in 2100, signaling unprecedented tax/transfer adjustments to achieve fiscal sustainability. In this paper, we develop a quantitative overlapping generations model to measure the impact of guest worker programs in Japan. Against a baseline general equilibrium transition in which the consumption tax adjusts to achieve fiscal sustainability, we compute alternative transitions with guest worker programs. Depending on the size and skill distribution of guest workers, these programs may mitigate Japan’s fiscal imbalance problem with a relatively manageable increase in the consumption tax.

Past government spending in Japan is imposing a significant fiscal burden that is reflected in a net debt to output ratio near 150 percent. In addition, an aging Japanese society implies that public expenditures and transfers payments relative to output are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure

the size of this burden in the form of additional taxes required to finance these projected expenditures and to stabilize government debt. The fiscal adjustment needed is very large, in the range of 30-40% of total consumption expenditures. Using a distorting tax such as the consumption tax or the labor income tax requires either tax to rise to unprecedented highs, although the former is much less distorting than the latter. The extremely high tax rates we find highlight the importance of considering alternatives that attenuate the projected increases in public spending and/or enlarge the tax base.

Japan is aging and has the highest government debt to output ratio among advanced economies. In this paper we build a micro-data based, large-scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules. Using existing pension law, current fiscal policy, medium variants of demographic projections, we produce future paths for government expenditures and tax revenues, with implications for government debt and the public pension fund. Additional pension reform, a higher consumption tax, and higher female labor force participation help achieve fiscal stability.