# B4 Simulation Analysis in Ihori et al. (2011)

## B4.1 Assumptions

Our second simulation (2011) uses more recent data. Since the *Projection of the Future Population in Japan* only gives estimates of the future population until 2105, it is assumed that the number of births and deaths, and the survival rates after 2105, are fixed at the same levels as those in 2105.

With regard to medical costs as a function of age, from 2008, the future sequence of government deficits is given based on the following assumptions. Since the average growth rate of the ratio of government debts to GDP (the debt/GDP ratio) between 1998 and 2007 was calculated to be 5 %, the growth rate of the debt/GDP ratio in 2008 is assumed to be 5 %. Further, the growth rate of the debt/ GDP ratio from 2009 is assumed to decrease by 0.5 % every year.

This implies that the annual growth rate of the debt/GDP ratio from 2009 is given as 4.5 %, 4.0 %, 3.5 %, and so on. Then, it is assumed that the growth rate of the debt/GDP ratio continues to decrease until 2019 and also that the growth rate of the ratio becomes zero after 2019. This implies that the debt/GDP ratio remains constant after 2019 and that the constant debt/GDP ratio is 150 %.

From 2008, the U-shaped pattern of 2007 is assumed to continue. The growth rate of per capita national medical expenditure is assumed to be the same as that of technological progress in production. The copayment rate is assumed as 20 % for those aged 20-69, 10 % for those aged 70-74, and 5 % for those aged more than 75. Note that the actual copayment rate in recent years at the aggregate level is calculated to be approximately 14 % on average.

Except for a consumption tax, all taxes (a labor income tax, an interest income tax, and an inheritance tax) are assumed to be fixed at the 2007 rates. In contrast to the earlier simulation (2005), the value of technological progress from 2008 is assumed to be 1 % in this simulation.