When do we Start? Pension reform in ageing Japan

Abstract

Japan is faced with rapid demographic ageing and fiscal challenges. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by 3 years gradually over a 30-year period. We consider three scenarios with different points in time to initiate reform in 2020, 2030 and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising tax burden by more than 8% of total consumption. Delaying reform implies a transfer of costs of demographic ageing to the young and deteriorates the welfare of future generations by up to 3% in terms of consumption equivalence.