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Japan: The pension system in peril


Japan Times


 June 18, 2003

Japan's protracted economic slump, combined with the accelerated aging of the population, is putting increasing strains on the public pension system. The government-managed corporate-sector pension program, which now has 30 million subscribers, registered a large deficit in fiscal 2001. For the first time since the current system started in 1954, annual expenditures surpassed revenue.

The deficit, which amounted to nearly 700 billion yen, is worrying because it reflects a continuing deterioration, not just a temporary decline, in public pension finances. The government is primarily responsible for this. The system is updated every five years, but so far drastic reform has been avoided. The next quinquennial review, scheduled for 2004, may be the last chance to restructure the crumbling program.

The Ministry of Health, Labor and Welfare gives three direct causes for the deficit: a drop in the number of subscribers, an increase in the number of pensioners and shrinking investment returns on pension reserves. Indirectly, the revenue shortfall reflects the expansion of the elderly population and the anemic growth of the economy.

The last reason has much to do with the government's economic policy. The series of economic stimulative measures taken in the past have failed to revive the economy, contrary to the upbeat projections made by successive administrations. The murky economic outlook has further increased uncertainties over the future of the pension system, particularly among young workers.

The basic mistake made by the government was that it overestimated the economy's growth potential despite the collapse of the asset bubble. In 1999, the last time the pension system was revised, gross domestic product was projected to expand an average 1 percent annually in the next five years. Prices and wages were predicted to rise 1.5 percent and 2.5 percent, respectively. Investment returns were estimated at 4.5 percent.

As it turned out, the number of subscribers fell short of the estimate by 2.8 million, partly due to stepped-up corporate restructuring that resulted in further layoffs, while the number of pensioners exceeded the projection by 1.7 million. Actual investment returns dropped from 3.62 percent in fiscal 1999 to 3.22 percent in fiscal 2000 and to 1.99 percent in fiscal 2001.

The labor ministry says pension finances are not as bad as the figures indicate, citing a change in the asset-valuation method to one based on market value, not book value. That is not very convincing, however, in light of the latest results of asset management. For example, the drawn-out slump in the stock market has cut into the reserves.

Admittedly, it is never easy to manage a pension program in times of economic decline. That's true in other industrialized countries as well. France and Germany, for example, are also having difficulty maintaining the health of their pension programs. It would be unfair to shift all the blame for pension problems to the government.

Nevertheless this much can be said: Policymakers had opportunities to prevent the problems from getting worse. They could have raised premiums, for example, to make ends meet. The current system is premised on the principle that the working generation should support the lives of elderly pensioners.

In times of inflation, premiums must be raised if pensions are to be increased in proportion to price increases. In times of deflation, however, pensions must be reduced in accordance with price falls. In reality, though, the government has either postponed premium increases or frozen price indexation because of the economic recession. Such a halfhearted approach has worsened pension finances. In the end, the government has had no choice but to raise the age at which retirees become eligible for pensions by five years to 65.

Currently the Council on Social Security and related committees in the ruling parties are discussing the labor ministry's 2004 reform plans. One proposal would raise the premium rate gradually to a maximum of 20 percent of the annual salary from the present 13.58 percent. Higher rates would likely be accompanied by lower pension levels.

Another plan is designed to split pensions (excluding basic pensions) between husband and wife. Other plans in the works include extending coverage to part-time workers and improving the pension system for women. In addition, the ministry calls for raising the government share in the funding of basic pensions to one-half from the present one-third.

All plans have their merits and demerits, in part because they involve knotty fiscal issues. But they provide a launchpad for constructive discussions. If hard choices are avoided, public confidence in the pension system will plummet, leading eventually to its collapse.

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