No. 13 — March 31, 2000


Weekly Review

--- by Douglas Ostrom

The United States is not the only industrial nation to face a looming crisis in its program to provide retirement income to a broad cross section of older citizens. As a first step toward overhauling Japan's even more troubled system (see JEI Report No. 12A, March 28, 1997), the Diet approved a package of seven bills March 28 that will trim benefits and shore up funding. Critics complain, though, that the legislative initiative, which the Diet first tackled during last year's special session, raises almost as many questions as it resolves, in part because coalition government lawmakers tried to make some aspects of the reform less onerous to participants.

The changes affect both the national pension plan, or kokumin nenkin, which is somewhat analogous to the social security system in the United States in that it potentially covers virtually all people, and the various second-tier public-private retirement plans collectively known as kosei nenkin. The latter, however, will bear the brunt of the adjustments.

Starting April 1 of this year, salary-linked benefits for new private-sector retirees who participate in kosei nenkin plans will be cut by 5 percent. Moreover, between FY 2013 and FY 2025, the eligible age for kosei nenkin payments will be raised in stages to 65 from the current 60. In the future, consequently, some employees who are forced by their firms to retire at age 60 may have to wait five years to receive benefits. At the same time, the large number of people between the ages of 65 and 69 who still work face the prospect of reduced retirement income, with the size of the hit depending on their salaries or wages. However, the increase by 2025 in employee contributions to the kokumin nenkin system will be somewhat less than previously forecast.

Most of the 20 million people who now depend on kokumin nenkin benefits will not be affected right away. In fact, they probably will come out ahead in the long run. The reason is that the just-approved legislation mandates an increase in the Treasury subsidy to the kokumin nenkin system to 50 percent by 2004 from the current government funding level of 33.4 percent. The Liberal Democratic Party and its allies maintain that the hike in public financing is necessary given the projected decline in the number of workers to support each retiree. There will be just two workers for each retiree in 2020 versus 4.4 workers as recently as 1997.

As a consequence of the changing funding formula, the projected monthly increase in employee kokumin nenkin premiums will be scaled back by 31.1 percent compared to the level they had been expected to reach by 2025. However, the increase in government funding — estimated at a whopping ¥2.2 trillion ($20 billion at $1.00=¥110) annually, is unfunded at this point. That is one reason why the opposition parties voted against the legislative package.

In short, retirees' government-provided pension-type income will change according to how long they work and which plan or plans they participate in. For Tokyo, which currently has the largest budget deficit in the industrialized world, the legislation saddles it with future tax obligations while also enabling it to cut benefits. The two, however, do not cancel each other out. Not a few critics contend that Tokyo should begin looking now for additional revenue sources. Some even have advocated another hike in the consumption tax, which was raised in April 1997 to its current level of 5 percent from 3 percent, with arguably disastrous effects on the economy.

In the present environment of "dessert before elections, vegetables after," virtually no one expects the LDP to propose a tax hike any time soon. Yet, most analysts agree that one eventually will be necessary.

As if to underscore the demographic changes that are driving Tokyo's reform of its social security-like system, the Management and Coordination Agency announced March 23 that Japan's population grew last year by a scant 0.16 percent from 1998's total to 126.7 million, the smallest increase yet. Moreover, the population under the age of 14 dropped to 18.7 million, or 14.8 percent of all Japanese — the first time that this figure has fallen below 15 percent. This cohort, of course, is the group that will be paying presumably higher kokumin nenkin premiums and taxes 25 years from now to partially support Japan's ever-growing older population, which expanded 3.2 percent last year. The census also revealed that the number of people between 15 and 65 years old, traditionally considered the working-age population, had declined for the fourth year in row. In short, the ranks of people receiving social security-type benefits are rising, while the group paying into the system arguably is shrinking. Not only is the premium burden on the employed population expanding, but it may worsen when the youngest cohort replaces the current group of workers.

These demographic facts also are affecting labor policies. Even though unemployment remains close to its postwar high of 4.9 percent, Tokyo again is worried about an expected labor shortage, just as it was during the "bubble economy" years of rapid growth in the second part of the 1980s. In a plan released by the Ministry of Justice March 23, the government said that it would consider permitting larger numbers of foreign workers to enter Japan to fill job openings in certain fields. In yet another acknowledgement of shifting demographics, nursing and home health care for older people are among the occupations for which easier entry requirements are being weighed. Japan and MOJ in particular traditionally have maintained policies toward "guest" workers that by North American and European standards are unusually strict.

The size of government-provided retirement benefits in the future will depend a great deal on how well the economy does. If Japan can reignite sustained growth in this decade, the income base that supports its social security-like program obviously will increase. However, most analysts believe that Tokyo remains too optimistic in its assumptions regarding both economic performance and population expansion. If the economy grows extremely slowly over the next 10 years, per capita income could even decline, reflecting the fact that the income produced by a shrinking labor force will be spread over a still-growing population. Obviously, the job of supporting an ever-bigger group of older people would be a severe burden under these circumstances.

Clearly, an expansionary fiscal policy in the form of larger public-sector expenditures cannot be continued indefinitely in light of the demographic changes that increasingly will drain government coffers. Over the long term, most analysts believe that the restructuring of Japan's economy, including widespread deregulation, is the only answer. In other words, the public pension system, immigration policy and structural reform have to be treated as a unit. Whether Tokyo will end up with a set of cohesive, consistent policies over the next decade to deal with these related issues remains to be seen, the latest retirement plan reform notwithstanding.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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