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State-paid pensions short on funds, faith

By Reiji Yoshida

The Japan Times, April 29, 2003

Mariko Horiuchi, a 30-year-old part-time English-language teacher living in Tokyo, wonders if she should trust what the government promises for her future: a sound retirement covered by state pension benefits.

She does not take the promise at face value. Instead, she seriously worries whether she will receive benefits worth what she will have paid over decades of working.

"I've heard (that the) returns will be too small," Horiuchi said, noting many of her friends working at temp-staff companies have not paid premiums for the Basic Pension System, which is supposed to cover all workers aged between 20 and 60. "I'm wondering if I should pay the premium next month."

Statistics show she is not alone in her feelings, and experts say she has good reason not to pay.

Faith in the state-run public pension program, one of the nation's most fundamental social security safety nets, has been rapidly drying up.

An increasing number of people are opting not to pay premiums for what should be a "compulsory" pension system to support the rapidly aging society. Experts say the trend could eventually bring financial collapse to the program unless radical reforms are carried out.

The chance for reform may come when the government raises its funding for the Basic Pension System from the current one-third to half of the system's costs in fiscal 2004.

The government has started heated debate, and the Finance Ministry and the Health, Labor and Welfare Ministry are preparing a reform blueprint for release in June.

If the current situation drags on, young premium-payers will not be able to receive benefits worth what they pay in, according to a simulation by the private think tank Japan Research Institute.

A hypothetical household consisting of a nonworking wife and a salaried husband both born in 1940 will pay 25.33 million yen in premiums before retirement and receive 67.97 million yen in benefits, or 2.68 times the premiums, according to a calculation based on 1999 money figures.

But a similar couple born in 1980 will pay 63.45 million yen to receive only 46.54 million yen, or 0.73 times the amount paid.

People born in 2000 will receive benefits of only 0.61 times what they will pay in.

This big generational disparity has apparently led to an exodus of self-employed workers from the Basic Pension System.

Salaried workers generally have no choice but to pay, as their premiums are automatically deducted from their paychecks.

Of 22.53 million self-employed workers, 3.64 million have either not paid or not joined what should be a compulsory national pension system, according to welfare ministry statistics in 1998 and 1999.

"About half of them are in their 20s. They won't pay when they are in their 30s or 40s," said Kazuhiko Nishizawa at the Japan Research Institute. "The whole system is now collapsing."

In addition, another 5.05 million people are currently exempt from paying premiums because their income is low or for other reasons.

In all, 38.6 percent of the self-employed population does not pay premiums for a system that was originally designed to cover all workers in Japan.

Welfare ministry officials often argue that the generational disparity should not be the focus of reforms, because the pension system should be based on support by younger generations, not on a simple calculation of premiums paid as an investment and return for each individual.

They also argue that increasing the premium burden on younger members of the workforce is inevitable given the rapidly aging society, as the number of people aged 65 and over will have increased from the current 20 percent to 40 percent of the population by 2050.

"The imbalance (in benefits) was not directly due to the pension system," Toru Doyama, an official at the Health, Labor and Welfare Ministry's Pension Bureau, said in reference to the growing ranks of the elderly population.

Hitotsubashi University professor Noriyuki Takayama notes that the aging society is not the only reason for the huge generational gap in benefits.

"(The government and politicians) have promised too many benefits with too few premiums for the older generations, without securing the source of funds," Takayama said. "That's the problem."

According to the Finance Ministry, the "kosei-nenkin" public pension system for salaried workers had benefit liabilities totaling 725 trillion yen at the end of the 1999 fiscal year.

Kosei-nenkin consists of the Basic Pension System plus an additional income-proportional pension for corporate workers.

Of the 725 trillion yen in total liabilities, revenue sources have been secured for only 269 trillion yen so far. The remainder must be recovered by raising the premiums paid by future generations, according to the current plan by the welfare ministry.

Takayama pointed out, however, that if separated from liabilities caused by past promised benefits, future generations will be able to break even on their own, with only small premium hikes.

All generations should share the burden, he argued, noting that elderly pensioners should accept a cut in the benefits they've been promised and some pension financing should be covered by the consumption tax, which is paid by everyone.

"But the Health, Labor and Welfare Ministry is trying to pass all the burden on to future generations by raising their premiums. Why should they alone have to shoulder the burden?" Takayama asked.

One reason may be that it is politically more palatable to place the burden on generations not even born yet than to reduce the benefits already promised to today's older ranks.

"The welfare ministry can't cut benefits for (past generations) because it's politically difficult," a Finance Ministry official said, noting influential politicians in the ruling Liberal Democratic Party oppose cutting pension benefits for older generations.

Nishizawa of the Japan Research Institute said the Basic Pension System should be funded completely by revenues from the consumption tax, instead of the current insurance system, to reduce the generational disparity and ensure that younger people also pay premiums, however reluctantly.

Bureaucrats and politicians, however, have yet to reach a consensus on the issue or carry out radical reforms.

Prime Minister Junichiro Koizumi has clearly said he will never raise the consumption tax while he is in power, apparently fearing that a hike in the unpopular levy would trigger a political backlash that would push him out of office.

Welfare ministry officials meanwhile have staunchly argued that the current system should be maintained.

They say that running the pension system by an insurance scheme has advantages over funding it with the consumption tax because it makes a clear link between what people pay and what they receive.

But observers say the welfare ministry only wants to maintain the 17,000 bureaucrats engaged in collecting premiums as well as administrative control over the public pension fund, which now totals 150 trillion yen.

In this regard, the welfare ministry has drafted a reform plan as a basis of discussion toward June.

The plan calls for premium payments by salaried workers to be raised gradually to 20 percent of their total income until 2022, with the rate fixed thereafter.

But little attention has been paid to the generational disparity.

According to a calculation by Nishizawa based on the ministry plan, a couple born in 1940 will receive 2.63 times what they pay, while the return ratios stand at 0.94 for a couple born in 1960, 0.67 for a couple born in 1980 and 0.6 for a couple born in 2000.

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