INTRODUCTION

Japan is the world's most rapidly ageing country due to its having the longest life expectancy. In 2003, life expectancy at birth for males was 78.36 years, up by 0.04 years from that of the previous year, and that for females was 85.33 years, up by 0.10 years. In 2004, there were 24.9 million elderly (65 years and above), accounting for 19.5 per cent of the total population. The proportion of elderly is expected to increase sharply to reach 25.3 per cent by 2018 and more than 30 per cent by 2033 (Takayama 2004). The aggregate cost of social security in terms of national income is estimated to increase from 17.2 per cent in 2004 to 24.3 per cent by 2025, if there are no changes to the current provisions for benefits. In Japan, nearly 70 per cent of total social security benefits is distributed to the elderly. In 2004, pension payments amounted to 9.2 per cent of GDP and health care expenditure amounted to 5.2 per cent. It is projected that by 2025, pension payment will increase to 11.6 per cent and health care expenditure to 8.1 per cent.

Studies on social security in Japan have focused on issues relating to sustainability of the pension system, the cost of social security, and the need for pension reforms. Takayama (1992, 1998) assessed the effects of a greying Japan on the government budget and raised the need for a pension reform to address the sustainability issue. Horioka (1997, 2004) has focused on the savings behaviours and portfolio composition of the Japanese elderly and found strong motives for retirement and precautionary savings. Hurd and Yashiro (1997) examined the economic status of the elderly and found that generally the elderly in Japan are much more dependent on public pension, with as much as 80 per cent or more of their elderly income coming from public pension. The elderly in Japan have less financial asset income because they hold a much greater fraction of their wealth in housing assets.