Japan should take every possible measure to cope with an ageing population. One step is to reverse the decreasing fertility rate. But even if the fertility rate recovered drastically, it would not make much difference to the dependency ratio, because newborns would not enter the workforce for some decades. Japan must therefore promote the employment of older people.

If older people with the will and ability continue working beyond the current retirement age, it will reduce the average per capita burden of the ageing society. The increase in the number of active workers and consumers in their old age would be a driving force of economic growth on the supply side as well as the demand side of the economy.

Several obstacles

But Japan faces several obstacles that prevent it from promoting higher labour force participation among older people.

One obstacle is the public pension system. Any pension system will naturally make retirement more financially attractive to older workers. Japan's current system includes strong incentives for pension-age Japanese workers to retire or to reduce their working hours, including an earnings test that lowers the pension rate the more you work. Japan should consider reforming pension eligibility to improve work incentives.

Elderly Japanese, whose homes were destroyed in last year's tsunami and now living in temporary housing. Getty

Mandatory retirement practices are still dominant in Japan. While having mandatory retirement from one's primary job need not entail full retirement, in practice it often does. In Japan mandatory retirement reduces the probability of men aged 60-69 participating in the labour force, all other things being equal. Mandatory retirement also tends to push workers who stay in the workforce into jobs where their acquired skills and knowledge are underutilised, leading to a loss in productivity.

But if Japan revises mandatory retirement practices by lifting the legal minimum age of retirement or by introducing anti-age discrimination legislation, it will also need to change the seniority-based wage and promotion system. If a firm lifted the mandatory retirement age, while leaving seniority-based wages unchanged, it would have to raise its wage bill considerably. Tackling this will require co-operation between unions and employer groups.


Encouraging older Japanese people to stay in the workforce will only mitigate part of the problem. The social security system also needs urgent reform.

Benefits for young people should be more generous, particularly with respect to childcare. In the late-1970s, when the fertility rate started declining, the Japanese government should have been concerned about population decline. But it took until the 1990s for the government to introduce the so-called Angel Plan – a package of policies, which was not very daring, to promote comprehensive childcare support.

Unlike pensions, medical care, and long-term care – which are guaranteed revenue under Japan's social insurance system – childcare has historically not had any permanent revenue source. So in 2013 the National Council on Social Security System Reform, which I chaired, recommended that the government should reserve revenue from the consumption tax for childcare.

More difficult

Costs in the pension and in the medical and long-term care systems must also be contained. Changing the pension eligibility age will help with the former, but medical and long-term care spending will be more difficult to restrain. They will increase at more than the rate of increase of the older population. This is not only because people older than 75 are more likely to need medical and long-term care, but also because of the increase in the quality and the cost of medicine and care. Addressing this problem will require co-operation with service providers.

Japan's high debt-to-GDP ratio means that social security system reform is vital. These reforms will no doubt face political opposition from beneficiaries and service providers. But without them Japan will not be able to sustain the social security system that has enabled it to attain the highest longevity in the world for future generations.

Atsushi Seike is president and professor of Labour Economics at Keio University in Tokyo. This article is part of a series from East Asia Forum (www.eastasiaforum.org) in the School of Public Policy at the Australian National University.