Japan ministries disagree on pension reform

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Japan ministries disagree on pension reform

David Pilling, Financial Times.com

November 18, 2003

Japan's finance ministry on Tuesday joined a simmering debate on pensions reform, saying that a proposal from the health ministry to raise pension premiums could put an unsustainable burden on individuals and companies.
The ministry of health, labour and welfare this week proposed gradually raising premiums from the current 13.58 per cent to 20 per cent over several years in order to maintain current pension levels. Premiums are split equally between the employee and the employer.

Sadakazu Tanigaki, finance minister, was quoted by Kyodo news as saying: "The figure of 20 per cent is very close to the upper limit. I believe the burden is rather heavy for the public."

Business is reluctant to see its share of premiums rise, while some government officials fear that taking a bigger chunk out of workers' wage packets could further damage fragile consumer demand.

Shoichi Nakagawa, trade minister, said: "Both in the short- and long-term perspectives, the expected negative impact from the hike in the burdens are not good for the Japanese economy and Japan's future."

Pension reform, the broad outlines of which are expected to be decided by the end of this year, became a surprisingly strong topic of debate during recent lower house elections. In opinion polls, the sustainability of the pension system was regularly named as one of the top issues that concerned voters.

Komeito, the coalition partner of the ruling Liberal Democratic party, made pensions its top campaign issue. It proposed to maintain the existing, generous pensions framework through the elimination of a rebate on personal income taxes and a greater share by the government to finance the scheme.

The current system will become unsustainable in coming years as the labour force shrinks and the number of retirees grows. Along with Italy, Japan has the world's fastest aging society and its labour force is already falling by 0.6 per cent a year.

The government of prime minister Junichiro Koizumi has only limited ability to raise taxes to fill the gap since Mr Koizumi has ruled out an increase in consumption tax - one of the obvious sources for extra funds.

Finance ministry officials say that public anxiety over the sustainability of the pension system is an important impediment to consumer spending. High savings reflect workers' worries that they will need a future nest egg to supplement an expected shortfall in their pensions or to pay for tax increases.