Analyzing Japan's Public Pension Reform in an Overlapping Generations Economy with Heterogeneous Households

Abstract

Japan's aging population and shrinking workforce are straining the public pension system. This study extends a Bewley-type overlapping generations model with heterogeneous households, more precisely accounting for Japan's tax system and two-tier pension structure, to analyze the effects of Japan's public pension reform proposals on individual households, the aggregate economy, and social welfare. The model calibrated to the 2022 Japanese economy suggests that cutting pension benefits by 20%, raising the eligibility age by five years, and removing the pension adjustments and suspensions under the statutory system would all increase private wealth, thus capital stock, labor supply, and total output in the long run if the pension tax rate and the consumption tax rate were adjusted to balance the government budget. With regard to the welfare impact, current and near-future households would experience net losses on average, whereas future households would benefit overall.