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What to Do With the Old?

Japan's fast-ageing population isn't unique, only early...
In 1989, 11.6% of the population of Japan was over 65, writes Nathan Lewis at New World Economics.
In 2006, it hit 20%. In 2055, it is expected to reach 38%.
I assert that it is possible to have economic abundance with a shrinking and graying population. But not if you do things the same old way.
How should a government deal with this? Care of the elderly has been a part of human society from prehistoric times. But there have never been so many elderly.
This is not a uniquely Japanese problem. Japan's fertility rate of 1.42 births per woman is actually rather common throughout the developed world, and even the developing world. Italy is the same (1.42), and South Korea is lower (1.25). Japan just happens to be a forerunner in these matters. Thirty per cent of the population of China is expected to be over age 60 in 2060.
One thing we know for sure: programs developed for completely different conditions, like Japan's present public pension system ("Social Security" in the US), are completely inappropriate. These date from the 1950s, and were originally modeled on programs initiated in Prussia in the 1880s.
That was then. This is now.
All public welfare programs in Japan, including public pensions and health, cost 5.77% of National Income (similar to GDP) in 1970. In 2012, it was 31.34%, and expected to rise further. A lot further.
Let's start with a simple proposition: a government, like Japan's, does nothing at all. No public pensions, or any other program. In other words, the small-government, libertarian option. Obviously, this is also the cheapest option. Doing nothing costs nothing.
While we're at it, we will also eliminate the public health system.
I'm not saying this is the best option. There's a reason why public pension systems have developed over the past century. However, it is the way things were for most of human history, until only a few decades ago, and serves as a good departure point for thinking about these topics.
There's a big advantage here: you could eliminate Japan's quite hideous payroll tax system. In 2013, the payroll tax rate was apparently 14.42% for companies and 13.94% for individuals, for a total of 28.36% – with no upper limit on income. Eliminating this tax would go a long way toward maximizing the productivity of the working-age population. The productivity of the working-age population is the resource that ultimately supports elderly people, one way or another.
Most elderly in Japan would likely live with their adult children. This is a long-standing tradition in Japanese culture, like most any culture around the world. The recent fashion for independent elderly living would be abandoned as an expensive luxury – or even just a mistake, as community and family is important to elderly people.
Savings rates would likely increase, as people prepared for future times of need. Such high savings would likely translate into a much higher level of domestic investment, which is the engine for more and better-paying jobs – the jobs held by the working-age population who have to, one way or another, support the elderly. Indeed, many elderly themselves could be hired for less-demanding jobs of one sort or another, with employers hungry for any employees they can get in the capital-rich/labor-scarce environment, just as was the case during Japan's high-investment years of the 1960s. Savings rates in those decades were commonly over 20%; today, they are close to zero. Corporate investment in Japan, net of depreciation, shows a similar pattern.
Large and stable corporations may begin to provide more comprehensive elderly support, but perhaps not in the problematic format of a monetary "pension" as is common today. For example, a Nissan Motors or Nippon Steel could provide housing and living facilities directly for its retired long-term employees, in this way simply expanding the existing Japanese corporate traditions of providing housing and cafeterias for working employees.
Perhaps many of these corporate elderly could remain employed by the company in some less-demanding, perhaps part-time fashion – for example, in an elderly-care function themselves. I suspect that one occupation that those in the 60-75 age bracket might be well suited for is care for those over 75.
Healthcare systems today tend to consume a lot of money in the process of dying. There's a reason for this: it is profitable, and has a guaranteed customer base. Death remains incurable. However, a better sort of public healthcare system might concentrate on those issues where there is the greatest advantage at the lowest expense – physical trauma (injury from accidents) and infectious disease. Those beset by chronic lifestyle-related disorders, or the simple processes of aging, would get mostly advice.
This might cost 2% of GDP.
The main focus of public health systems perhaps should be those under 65 – those with the most potential years remaining, most likely to have dependents, and who can contribute most to society. Again, the focus of public programs can be on trauma and infectious disease. Those with lifestyle-related disorders can be given advice on lifestyle alternatives. Fortunately, living is a lot less dangerous than it once was, so physical trauma is rarer. Infectious disease is not nearly as common as in the past, and generic antibiotics are cheap and easy to administer. This sort of basic public health system could be quite inexpensive. Other healthcare services would be provided through the private sector.
With institutions such as these, the Japanese government would not be burdened with impossible demands. Thus, taxes could be kept low, savings rates might be high, and the economy – in other words, working people – would be growing and prosperous. Ultimately, it is this actual economic productivity of working people that will be drawn upon to support nonworking elderly, whether the government is small and libertarian or embraces centrally-planned communism.
You might not like my ideas, but they are likely to come about, in some form, whether you like them or not. The Japanese government's present overindebtedness is likely to be resolved by either default or, more likely, currency debasement. In that case, the existing public pension system, though it remains in form, would likely disappear in practice, as monthly payments become essentially worthless. This is what happened to pensioners when the Soviet system collapsed into hyperinflation in Russia in the 1990s, for example.
Alas, it seems like nobody today wants to think about these things. They would just like to continue the present, unsustainable status quo. Even Japanese intellectuals, I am told, are again "looking to the West" for solutions – and none are forthcoming, as the West is itself looking to Japan, to perhaps provide an example that they too can follow.
When nobody even tries to solve the problems of the day, they tend to not get solved. In any case, a round of crisis and default is perhaps necessary in Japan to clear the decks of the detritus of past error. Nothing particularly good is going to happen as long as the government continues down the path of increasing taxes, increasing indebtedness, and printing money to somehow keep the whole thing from falling apart.
But, something good could happen afterwards. Start planning now.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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