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On the Design of Social Security Financing

Yasushi Iwamoto

No CARF-J-024, CARF J-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper considers the scheme of social security financing that will be sustainable under the coming population aging process. A reform of privatizing the earnings-related part of public pensions is discussed in detail, and a reform of introducing a risk-adjustment scheme into health insurance and moving to a funded-system follows. The following four points characterize the sustainable social security system that can well handle the risks surrounding the future economic condition and social security. (1) Public pension should be a mixture of the pay-as-you-go system and the fully-funded system. (2)The funding scheme should be introduced to not only the public pensions but also health insurance and long-term care insurance. (3) When the pay-as-you-go public pension is designed as a defined-contribution scheme, the future benefit level should be cut so that it perfectly reflects a decline of fertility rate. (4) If an unexpected adverse aggregate shock is realized, an intergenerational risk sharing scheme should absorb it.

Pages: 59 pages
Date: 2006-06
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