Safety net as a system

Fellow, RIETI

There is considerable controversy regarding safety nets in Japan. Several arguments have been presented in various proposals, including the government's "muscular reform plan," and those by the Council for Comprehensive Regulatory Reform, the Office for Structural Reform of Industries and Employment, and the Japan Medical Association, in addition to replies from relevant government agencies.

Safety net reforms are needed to cope with Japan's demographic composition and its economic structure. To ensure the success of such reforms, it is essential to break away from the conventional corporate welfare system and redesign such market safety nets as a system that provides an appropriate balance between public burden and individual responsibility on the assumption of greater population mobility in the future.

Ongoing discussions can provide reasonable solutions for each reform. Nevertheless, based a more detached perspective of such safety nets, a number of challenges emerge, including whether safety net proposals are compatible with the nation's reform efforts.

First, these safety nets are the result of long-term, diverse processes. It would be impossible to efficiently achieve reform goals by simply restructuring safety nets in one sector, as they are deeply interrelated with the safety nets in other sectors. We need to review such connections and complementary relationships among all safety net systems.

Second, current discussion over reforms concentrates on short-term issues, and little attention is directed to the governance of safety net systems, i.e., how to allow each system to maintain itself in a continuous, dynamic manner.

Complementary relationships among systems

Regarding a safety net system, we should discuss the integration of a wide variety of mutually complementary safety nets into a single system so that it functions as an organic system under which mutually compatible safety nets compliment each other. In this regard, there are a large number of problems to be discussed: pension plans to expedite job turnovers, adequate shares of the safety net related burden to be imposed on businesses to enhance competitiveness, relationships among the livelihood protection system, unemployment benefits and pension plans, and a system for selecting an optimal social security program.

It is not appropriate to discuss the safety net, itself worth as much as several tens of trillions of yen, without addressing its relationship with Japan's economy and society as a whole. Now that the government is committed to structural reforms and economic measures, we should design a system with a clearer vision of the economic and social system as a whole, instead of sticking to compatibility within each field. To realizes such a system, several factors must be considered: its relationship with macroeconomic factors, including the propensity to consume and changes in working-age population, industrial potential and productivity growth, and changes in individual lifestyle.

System governance

Recent discussions pay little attention to the issue of governance. For example, arguments for breaking away from the corporate welfare system are apt to emphasize greater government responsibility. Nevertheless, these arguments do not consider how the government should govern or administer the effective control, management and distribution of public funds. It is important to stress the responsibility of individuals. But advocating certain individuals can lead to the imposition of burden and responsibility solely on individuals when there are vast power gaps, including asymmetric flow of information, between such individuals and pension-fund managers or medical and healthcare service providers. We must consider how to build a framework to complement the capacity of individuals.

Most of the proposals regarding the unification of systems that involve the streamlining of medical systems and the use of tax revenues to pay expenses are ad hoc measures that do not clarify the relationship between benefits and burden, although such measures help simplify complex systems. Most critics do not pay sufficient attention to how we should efficiently control and manage available funds.

As seen in the issue of medical expenses for the elderly, many reform discussions are based on the assumption that fiscal expenditures will be limited and thus tend to focus on the means of acquiring sufficient funding. They are less interested in the construction of a scheme to maximize the total utility of concerned parties such as beneficiaries, expense bearers and service providers. They also devote less attention to the establishment of incentive measures for the implementation of the scheme.

In a safety net system, limited financial resources and clients (e.g., the elderly, patients, and unemployed) are connected to each other by the administrator of each system (e.g., pension programs, health insurance societies, and employment insurance systems). The concept of corporate governance can be applied to this issue because this concept and a safety net system are based on a similar mechanism. Regarding how to meet the needs of money suppliers and clients, we need to devise a dynamic framework and incentive measures in terms of corporate governance.

Safety nets are intended to fix market failures that involve equity and fairness concerns and the income redistribution. Therefore, there will be resistance to the introduction of a market mechanism to safety nets. At the same time, however, we are not confident that the current systems can realize social justice when there are wide differences in benefit eligibility among pension programs and in service level among regions. Under these circumstances, we are required to reengineer the current approach to the realization of public welfare under which the market mechanisms are used to make up for market failures. In this way, we can continue to cope with social changes and efficiently coordinate the conflicting needs of beneficiaries and cost bearers.

It is essential to deepen our discussion of redesigning a dynamic safety net framework that incorporates all safety nets into an organic system capable of benefiting the economy and society as a whole.

August 29, 2001

August 29, 2001

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