Japan's Big Problem

Fixing this gets harder as the problems roll on...

In the LAST twenty years, Japan's government could have sallied forth and fixed a lot of the problems that have been accumulating over the years, writes Nathan Lewis in this update on Japan penned in 2023 and published on his New World Economics blog.

Mostly, this has been intensifying welfare/social security/healthcare burdens, on a weakening economic base. Despite the tendency of governments to adopt an "austerity" response here, which mostly means Higher Taxes, the solution is rather, tax reform which results in lower tax rates, although the revenue/GDP ratio may remain unchanged.

But a much healthier economy would lead to rising GDP, and thus more tax revenue.

On the spending side, the main problem, just as in the US and most other developed countries, is legacy social programs, including needs-based welfare, public pensions (Social Security) and healthcare systems that are much too expensive and burdensome.

A much better solution has been found by governments such as Singapore, which relies primarily upon Provident Fund systems. These are basically private accounts with mandatory contributions, similar to Payroll Taxes but you get the money in an account owned by you. Singapore has no Public Pension (Social Security) system, but relies on a Provident Fund system that amounts to a mandatory 401(k)-type program.

Over a lifetime, even people of modest income can amass quite a lot of assets. There are still needs-based welfare systems for seniors who find that these private accounts prove insufficient. But, the number of such people is small.

Also, because there aren't a lot of spending programs, taxes are low (Singapore's revenue/GDP ratio is about 14%), which means a strong economy, which means that wages are higher and it is easier to accumulate assets, such as home ownership. Thus, people are wealthier, in general, upon retirement, or even can continue working at a higher wage if they prefer.

Also, as people die, they leave more assets to their children, including any Provident Fund retirement assets that they did not use. These inheritors are themselves often close to retirement, so they enjoy a quick bump-up in retirement assets from their parents.

Although Japan's healthcare system is, I would say, not bad (compared to the disaster in the US), nevertheless Singapore's market-based system is much better – accomplishing better outcomes at about half the price. This too has a Provident Fund system, or what amounts to Health Savings accounts with mandatory contributions.

Singapore has the same pattern of aging population and low fertility as Japan, but none of the fiscal problems. Its systems are much better suited for our time.

Japan's government could have spent the last two decades adopting a model something like this, but of course they instead played smoke-and-mirrors with government financing, while allowing all other problems to fester and worsen. This is very dumb; but, alas, also very common.