Pension system bugbear only got band-aid fix

by Tetsushi Kajimoto

Staff Writer

Five years was not enough time for Prime Minister Junichiro Koizumi to overhaul the nation’s ailing pension system.

Koizumi, who steps down in September, must be content with a 2004 stopgap reform aimed at preventing further deterioration of pension finances.

Now, whoever takes over the top post will have to address questions that have been put off if a long-term fix to the pension system’s woes is to be found, experts say.

Senior Vice Justice Minister Taro Kono, who has announced his candidacy for the September Liberal Democratic Party presidential election, said last week at a fundraising event he will advocate pension reform.

“Much credit should go to Koizumi for preventing the nation’s pension finances from further deteriorating through the 2004 law change,” said Kazuhiko Nishizawa, chief researcher at Japan Research Institute Ltd. and an expert on the pension system.

“However, (the Koizumi government) has not pursued structural pension reform.”

Takashi Oshio, a professor of economics at Kobe University, also believes the government made progress with the 2004 pension reform.

But Oshio argues in his book, “Jinko Gensho Jidai no Shakai Hosho Kaikaku” (“Social Security Reform in an Era of Declining Population”), that the structural problem has not changed. The government has left open the question of who will shoulder the cost of the pension deficit, estimated at 570 trillion yen.

In the two years since the government and ruling coalition enacted reform legislation, the pension system has been rocked by scandals over benefit disbursements and leaks of confidential information, including that key lawmakers were failing to make their mandatory pension premium payments. This sparked a rash of political fallout.

Social Insurance Agency officials have been punished for looking at the personal data of prominent pension subscribers and disclosing such data to the media.

And in an effort to make the rate of nonpayment of premiums appear lower than it was, the agency was found June 13 to have waived pension premium payments for nearly 200,000 people in 29 prefectures — without their knowledge.

The misdeeds forced the government and ruling bloc to abandon efforts to pass during the recent Diet session a bill that called for abolishing the Social Insurance Agency and replacing it with a new pension services agency. Lawmakers will revisit the issue in an extraordinary Diet session this fall.

Despite the setback, the ruling coalition hails the 2004 pension reform, which gradually raises premiums and cuts benefits, as helping to put the nation’s pay-as-you-go pension system in order as the population ages and the birthrate falls.

While the government and ruling bloc have agreed to integrate the pension plans for company employees and for bureaucrats and to submit legislation to the Diet next year, they stopped short of developing a strategy for integrating the two plans with the National Pension Scheme for self-employed and part-time workers, citing difficulty in determining the income of these people.

The opposition camp has been calling for a more radical overhaul of the pension system, saying all three schemes should be integrated to rectify inequalities and to ensure its sustainability.

Whatever the pros and cons of unifying the pension system, experts say the government must restructure the existing program. The current system, in which today’s workers support today’s retirees, is not compatible with a rapidly aging society.

The next prime minister will have to show strong leadership and address ballooning pension and social welfare costs by taking the politically unpopular step of raising the consumption tax.

Kobe University’s Oshio suggests the pension scheme should be divided into two parts. One would provide a fixed basic pension and be financed solely by the consumption tax — which he says should be raised from 5 percent to 9 percent. The other would be financed by premiums and benefits proportional to income.

Nishizawa argues that the government and ruling bloc should scrap the pending legislation and draft a new bill to merge the Social Insurance Agency with the National Tax Agency. This would ensure efficient collection of premiums from subscribers in the National Pension Scheme, he said.

Merging the two agencies would also help stop companies from pulling out of the pension system to avoid paying premiums, Nishizawa said.

Under the current system, employers pay half of the premiums and workers the other half.

As for the basic pension program, Nishizawa suggests the National Pension Scheme be financed by substantially hiking the consumption tax and earmarking revenue from the levy for social security.

“Whoever succeeds Koizumi must have strong leadership and the ability to persuade the public about the need to hike the consumption tax,” Nishizawa said. “The next prime minister must be strong enough to do the dirty work of pointing out the need for tax hikes to repair the pension and social security problems.”