Financing Health Care in Japan: A Rapidly Aging Population and the Dilemma of Reforms

This paper aims to provide a quantitative analysis of the influence of an aging population on the financing of Japan’s universal health insurance system and potential reform policies. We construct a general equilibrium life-cycle model to study the effects of aging on the tax burden, individual behaviors, the aggregate economy, and welfare. We also evaluate various policy alternatives designed to lessen the negative influence of aging on the economy. In particular, by investigating both steady states and transition paths, we analyze reforms of insurance benefits and tax financing tools that have welfare implications for future and current generations. We show that although the potential reforms significantly improve the welfare of future generations, political implementation of such reforms is difficult because of the large welfare costs for the current population.