17 January 2019

Japan

Laurence BooneOECD Chief Economist

Fiscal challenges and inclusive

growth in ageing societies

2

G20 populations are ageing rapidly

Source: National sources; Eurostat Population Projections (2008 revision); UN World Population Prospects, 1950-2050

(The 2008 Revision); United Nations World Population Prospects: The 2017 Revision.

Old-age dependency ratiosNumber of people older than 65 years per

100 people of working-age (20-64)

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

2015 2060

65 70 75 80 85 90 95

Indonesia

South Africa

India

Saudi Arabia

Russia

China

Turkey

Argentina

Brazil

Mexico

Germany

United States

United Kingdom

Korea

Italy

Canada

Australia

France

Japan

Years

1980 2015 2060

Expected life expectancy at age 65

3

G20 debt burden is already elevated

Note: LHS panel: Public debt ratios are based on the national accounts definitions except for EU countries where debt

ratios based on Maastricht criteria are shown. RHS panel: Total stock of debt liabilities issued by the general government

Sources: OECD Economic Outlook database, and IMF Global Debt database.

G20 Emerging EconomiesG20 Advanced Economies

0

50

100

150

200

250

0

50

100

150

200

250

2017 2007% of GDP % of GDP

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

2017 2007% of GDP % of GDP

WHAT ARE THE COSTS OF AGEING?

4

5

Ageing will weigh on living standards in most

G20 countries

Source: The Long View: Scenarios for the world economy to 2060, OECD Economic Policy Paper, Guillemette and Turner (2018).

Working-age population contribution to GDP

per capita growth between 2030 and 2060

By country, % per annum

Working-age population contribution to GDP

per capita growth between 2018 and 2030

By country, % per annum

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

%

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

%

6

Ageing will increase public pension

expenditure

Public expenditures on pensions

Note: * 2015 or latest available. **Projections are until 2060 for France, Germany, Italy and the United Kingdom; 2055 for

Australia; and 2050 for the others. Projections assume no further policy changes in the projection period.

Source: European Commission and Standard and Poor's.

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

2015* 2060**% of GDP % of GDP

7

Ageing will increase health expenditures

Public health spending today Public health spending projections

Note: Public health expenditures includes long-term health care spending. LHS panel: Expenditure excludes investments,

unless otherwise stated. 1. Australian expenditure estimates exclude all expenditure for residential aged care facilities in

welfare (social) services. 2. Includes investments.

Source: OECD Health Statistics 2017 database; OECD Long-Term Model; and OECD calculations.

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

182016 2030 2060

% of GDP % of GDP

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

2016 or latest available 2000% of GDP % of GDP

8

Ageing increase fiscal pressures

Change in tax revenue necessary by 2060 to stabilize debt ratios at current levels

Note: Projections are based on current policy settings. Based on projected government pension expenditures from

European Commission (2018) and Standard and Poor’s (2016), and projected growth in public health care expenditure per

capita with the methodology of Marino et al. (2017). Other primary expenditure is assumed to remain constant in real

terms on a per capita basis. “Other factors” mostly capture the initial gap between primary revenue and the level that

would stabilise the debt to GDP ratio, but also changes in GDP growth rates over the projection period.

Source: Guillemette and Turner (2018).

-5

0

5

10

15

-5

0

5

10

15

NLD AUS FRA GBR ITA KOR DEU ESP JPN CAN USA

% of potential GDP

Health expenditure Pension expenditure Other primary expenditure Other factors Total

% of potential GDP

9

Ageing could exacerbate poverty risk

0

10

20

30

40

50

60

%66-75 76+ Whole population

Poverty rate is highest above 75 yearsBy age

Note: 2016 or latest year available. Poverty defined as having incomes below 50% of median equivalised household

disposable income, after taxes and transfers.

Source: OECD Income Distribution database.

REFORMS TO ADDRESS AGEING COSTS

10

11

Standard structural reforms can help boost

living standards

Per cent increase in GDP per capita

by 2060 relative to baseline with

product market liberalization

Note: LHS panel: OECD countries are assumed to implement a package of reforms over the 2020-to-2030 period that would improve OECD

measures of product market regulation to the average levels for the five leading countries. RHS panel: OECD countries are assumed to

implement a permanent policy reform package between 2020 and 2030 that would close half of the current gaps relative to simple averages of

five policy indicators for the five leading countries. Policy indicators are: public spending on active labour market policies per unemployed

person, union bargaining excess coverage, public spending on family benefits in kind, maternity leaves and tax wedges for single earners.

Source: The Long View: Scenarios for the world economy to 2060, OECD Economic Policy Paper, Guillemette and Turner (2018).

-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

Employment rate Capital per worker

TFP Real GDP per capita% %

-2

0

2

4

6

8

10

12

14

16

-2

0

2

4

6

8

10

12

14

16

Employment rate Capital per worker

TFP Real GDP per capita% %

Per cent increase in GDP per capita

by 2060 relative to baseline with

labour market reforms

12

Educational attainment and life expectancy are important

drivers of the increased participation of older people

Decomposition of change in participation rate of 55-to-74 years oldChange 2002 to 2017, percentage points of the population aged 55 to 74

Note: ‘Other factors’ include changes in sex composition, changes in unemployment gaps and interactions effects that

cannot be attributed to specific factors. The unexplained component is the difference between the actual change in the

participation rate of 55-to-74 years-olds according to OECD labour force statistics and the model prediction.

Source: OECD labour force statistics and OECD calculations.

-10

-5

0

5

10

15

20

25

-10

-5

0

5

10

15

20

25

USA JPN GBR FRA CAN ESP ITA NLD DEU

Education Life expectancy Age composition

Pension wealth Statutory retirement ages Other factors and unexplained

Actual% pts % pts

13

Highly educated older workers are more

employable

Employment rates of older workers55 to 64, by educational group

Note: Data on upper-secondary education or below are not available for Japan.

Source: Calculations from the OECD Education Database.

0

20

40

60

80

100

% Tertiary education Upper-secondary education No upper-secondary education

14

Retirement ages will continue to increase

further in some countries

Note: Retirement age for men entering the labour at age 20. Future retirement age is for people who entered the labour force

in 2016, based on currently legislated provisions. Announced but not yet legislated measures are not reflected.

Source: OECD Pensions at a Glance dataset.

Statutory retirement age in G20 countries

By country

40 45 50 55 60 65 70 75

ItalyUnited States

AustraliaCanada

GermanyJapan

MexicoUnited Kingdom

ArgentinaEU 28

FranceKorea

TurkeyChina

RussiaSouth AfricaSaudi Arabia

IndiaIndonesia

Brazil

Current Future

15

Linking retirement age to life expectancy could

improve living standards

Increase in GDP per capita by 2060 if minimum and normal retirement ages rise by

at least two-thirds of gains in life expectancy at 65, relative to baseline

Source: OECD calculations.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

JPN AUS GBR DEU FRA ESP USA ARG CAN IND CHL BRA MEX CHN

%

16

Automatic adjustments are more common

after recent reforms

• Link retirement age to life expectancy: Denmark,

Finland, Italy, the Netherlands, Portugal, Slovak

Republic

• Automatic adjustments of benefits:

• To life expectancy

• To dependency ratios or fiscal balances of PAYGO

(paying attention to low income earners)

• Germany, Japan, Portugal, Spain, Sweden

• Flexible retirement (combining work+retirement;

retirement age) with adequate financial incentives:

e.g. Germany

17

Make better use of migrants’ skills

-20

-10

0

10

20

30

Low-educated Highly educated% pts

Differences in employment rates between foreign-born and native,

by level of education, 2015-16

Key messages

18

Lifting employment and productivity key to ensure fiscal sustainability and foster inclusiveness in ageing societies

Pension and social security reforms need to address double challenge of ensuring fiscal sustainability and providing adequate coverage

• Tackle barriers to employment of older workers such as mandatory retirement, lack of flexible work arrangements and seniority wage settings

• Promote skills development for older workers and life long-learning• Improve labour force participation of women, youth and migrants

• Link retirement age to life expectancy and allowing for flexible

work/retirement with adequate financial incentives

• Health systems: contain costs and improve efficiency to ensure fiscal

sustainability

• In emerging G20 countries, reducing informality to ensure sufficient

coverage and financing of pensions, health and LTC is the key challenge

ADDITIONAL SLIDES COULD MITIGATE AGEING COSTS?

19

20

Income sources of older people vary widely

Note: Public transfers include public transfers earnings-related pensions and resource-tested benefits. Income from work

includes both earnings (employment income) and income from self-employment. Capital income includes private pensions as

well as income from the returns on non-pension savings. The data shown are for disposable incomes (i.e., net of personal

income tax and social security contributions), measured on a household basis and adjusted for differences in household size.

Source: OECD Income Distribution Database.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Korea

Mexico

Canada

United States

Japan

Turkey

Australia

Spain

United Kingdom

Germany

Italy

France

Netherlands

Public transfers Occupational transfers

Private pensions and returns from non-pension savings Labour income (incl. self-employment)

Income sources of people over 652014 or latest available year

21

Persistently low interest rates pose challenges for

solvency and adequacy of private pension systems

-2

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015

United States Japan Euro area United Kingdom%

Long-term interest rates

Source: Thomson Reuters.

22

Life-long learning is important,

particularly for older workers

Workers’ participation in training% of all employed in each age group, 2012

0

10

20

30

40

50

60

70

55-64 25-54%

Workers reporting lack of computer skills2012

Note: Left:: average of 22 OECD economies Right: Job-related training during year prior to the survey in 2012. The

OECD average from PIAAC excludes Hungary, Iceland, Latvia, Luxembourg, Mexico, Portugal and Switzerland

Source: OECD estimations from the OECD Survey of Adult Skills (PIAAC).

0

2

4

6

8

10

12

16-24 25-34 35-44 45-54 55-65

%

23

Participation of older people can increase

further

Change in the participation rate of 55-to-74 year-olds2002-2017 with contributions by sex

-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

TUR MEX USA JPN KOR GBR OECD FRA CAN AUS ITA DEU

Male Female Total% pts % pts

Source: OECD labour force statistics and OECD calculations.

24

Pursue the reduction of early retirement

programmes

Participants in early retirements programmes in selected countries% of population aged 55 to 64

Note: the countries selected are those with long time series. Early retirement programmes are defined as those

facilitating full or partial early retirement of older workers who are assumed to have little chance of finding a job or

whose retirement facilitates the placement of an unemployed person or a person from another target group. Early

retirement benefits normally cease when the beneficiary becomes entitled to an old age pension. Data for Poland are

not available before 2005.

Source: OECD Labour Market Programmes database and Labour Force statistics.

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Belgium Denmark Finland France Italy Germany

25

Normal retirement ages are not keeping pace with

increases in life expectancy

Change in normal retirement age relative to life expectancy at 65

Under currently legislated rules, change 2016 to 2060, difference in years

Note: The figure shows the differences between the increase in the normal retirement age and the increase in life expectancy at age 65

over the period 2016 to 2060 on average for men and women. Retirement age for men and women entering the labour market at age

20. Future retirement age is for people who entered the labour force in 2016, based on currently legislated provisions. Announced but

not yet legislated measures are not reflected.

Source: OECD Pensions at a Glance dataset ; United Nations World Population Prospects: The 2017 Revision ; and OECD

calculations

-8

-4

0

4

8

Years

26

Room to increase contribution rates to increase

pension adequacy differs across G20 countries

Mandatory pension contribution rates for an average worker in 2016% of gross earnings of the worker

Note: Contribution rates include employee and employer contributions. The rates for both employee and employer are based on the gross

earnings of the worker. * indicates social insurance contribution, including non-pension benefits

Source: OECD Pension at a Glance 2017.

0

5

10

15

20

25

30

35

Public Private%

27

Replacement rate and sources vary among

G20 countries

Future gross pension replacement rates from mandatory public,

private and voluntary private pension schemesPercent of individual earnings, average earner

Note: Theoretical gross replacement rates, computed for an individual who enters the labour market in 2016, earns the average income and

contributes for a full career, 2016 legislation

Source: OECD pension models.

0

20

40

60

80

100

120Mandatory public Mandatory private Voluntary

28

Replacement rate vary among G20 countries

Projected future net replacement rates from mandatory pension schemes

Note: The future net replacement rate is estimated assuming labour market entry at age 20 in 2016 and a working life equal to the normal

pensionable age in each country. This normal pensionable age is defined as the age at which individuals can first withdraw their full pension

benefits, without actuarial reductions or penalties. The net replacement rates shown are calculated for mandatory schemes for an individual

with 100% and 50% of average worker earnings.

Source: OECD calculations based on the pension model

0

20

40

60

80

100

120

% Low earner Average earner

29

Improving financial literacy can help make better informed

retirement choices and increase voluntary savings for

retirement

Financial literacy% of respondents achieving the minimum target score on financial knowledge

0

10

20

30

40

50

60

70

80

90

100

%

Note: The minimum target score is reached when answering 70% of the financial knowledge questions correctly. G20 is the simple average

of the country percentages for all G20 countries with comparable data. G20 countries that are excluded from this figure do not have

comparable data.

Source: G20/OECD INFE report on adult financial literacy in G20 countries.