"Drastic Reform" of the Pension System
Visiting Fellow, RIETI
Coming back to Japan recently, I was struck by newspaper reports on reform of the pension system. It seemed that every day there were stories on page one or two about feuding between the Ministry of Health, Labour and Welfare (MHLW) and the Tax Commission, the Komei Party and the LDP, or the Japan Federation of Economic Organizations and MHLW. Once again we hear repeated calls to "correct intergenerational inequity" and talk of "the collapse of the pension system." Everybody seems to think that the country is doomed if the pension belt is not tightened immediately. Just four years after a law was passed to adapt the pension system comprehensively to the needs of an aging society, why are calls for "drastic reform" creating such a stir again? Allow this British pensioner to offer his thoughts.
(1) Discussion always revolves around concepts such as "the average pension fund contribution of the average wage earner" and "the average pension benefit." In reality, there are many kinds of pensioners. Some receive comfortable company pensions supplemented by fees earned for writing columns, like this one, while many live on nothing but a state pension. In any country, it is normal for the spread of pensioners' incomes to be greater than that among the current working population.
(2) The income spread within that current workforce is tending to increase. Moreover, it is likely to go on increasing in future, thanks to the working of the labor market, driven by factors such as technological advances and the scarcity of people with high-level skills. The chorus of "to hell with seniority-based pay, performance and results are what matter," often heard in Japan these days, will add momentum to this trend.
(3) At the same time, the shift from defined benefit pension plans to defined contribution plans (a euphemism for "uncertain benefit" plans) is being encouraged. Traditionally the pension system has had some income-redistributive effect, but the switch to defined contribution schemes would further reduce this effect.
(4) That will mean that the number of elderly people who have to rely on the social security "safety net" is bound to increase. They will have to undergo a means test and put up with the status of second-class citizens. Since 1995, the number of social security recipients in Japan has risen by 50% to more than 1.2 million. However, it is estimated that three times that number of people are entitled to claim social security payments but do not apply because they do not want to face the humiliation of relying on welfare.
(5) In the U.K. the basic pension now amounts to just 16% of the average male wage, and it is estimated that approximately half of all pensioners have incomes so low that they would be entitled to assistance if they submitted to a means test. Pension cutbacks began under the Thatcher government, when the index for state pension benefits was unhooked from the average wage and linked to the cost of living. In other words, the same "reform" that was carried out in Japan a few years ago.
(6) One point should be considered before Japan repeats the errors of the Thatcher government. Quite apart from any actual rise in crime rates, the increase in antisocial behaviour - rudeness, violent quarrelsomeness - has come to be seen as a serious social problem in the U.K. in recent years. That is what happens when people lose their status as "first-class citizens." The yobs are seriously affecting the quality of life in Britain.
(7) In most countries, and Japan is no exception, the basic pension is disguised as an "old-age savings plan," whereby contributions are returned to the payer in the form of benefits. In reality, however, the benefits paid in any given year are funded from the money contributed in that same year. Given that fact, it might be better to call contributions an "Old People Support Tax" rather than a "savings plan."
(8) The Japanese are great worriers about the future at the best of times, and if their fears about the pension system are not assuaged they will not spend. No spending means no demand. Without demand, the Japanese economy will not recover. If one wants "drastic reform," why not raise state funding of the basic pension in a single jump to 90% from next year? Where would the money come from? Preventing inflation is not a problem at present - in fact combating deflation is the issue. Rethink the notion that budget deficits must be covered by issuing government bonds. When deflation gives way to a mild and steady inflation and the economy recovers, taxes could be increased to cover the extra pension cost.
* "Jidai o yomu" column, Tokyo Shimbun, December 21, 2003. Ronald Dore has written more extensively about the pension issue in the March edition of Chuo Koron.
December 21, 2003 Tokyo Shimbun
February 6, 2004
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