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Chasm emerges as lawmakers debate tax reform pros and cons

by Natsuko Fukue

Tax and social welfare reforms will be the administration’s priority this year, according to Prime Minister Naoto Kan.

But a chasm has already emerged between the ruling and opposition camps, as well as between Kaoru Yosano, the new welfare reform and fiscal policy minister, and many other lawmakers in the Democratic Party of Japan.

What are the debate’s political implications? Should the public pension system be financed by premiums or tax revenues? Why are reforms necessary in the first place?

Following are basic questions and answers on tax and social welfare reform:

How does the current pension system work?

The public pension system consists of three parts: the basic pension system designed for all residents of Japan as well as two income-proportional pensions — “kosei-nenkin” for corporate workers and “kyosai-nenkin” for government workers.

They are basically run with premiums paid by the insured, but one-third of the costs for the basic pension system was long financed by tax revenue funneled in from the central government.

To spread out the burden from growing premiums, the government raised its share of funding the basic pension system from one-third to half in April 2009.

But this increase is now being financed by temporary funds because the debt-ridden government is unable to find additional permanent revenue.

To receive benefits from the basic pension system, people have to pay their insurance premiums for at least 25 years.

Those who paid the insurance fee for the maximum 40 years received about ¥66,000 a month in 2009, according to the Social Insurance Agency.

Why are reforms necessary?

For now, the government urgently needs to find new, permanent revenue sources to pay for its increased share of the funding burden.

Over the long run, it is feared the rapidly aging society will make the pension system unsustainable unless revenues are increased dramatically or drastic cuts are made to benefits.

According to a Cabinet Office survey in 2009, 22.7 percent of the population was 65 or older. That figure will jump to 40 percent by 2050, according to the Internal Affairs and Communications Ministry.

What is the pension reform the DPJ has advocated in its campaign platform?

The DPJ came up with the idea of financing basic pensions fully through taxes so that all taxpayers can receive a monthly payment of ¥70,000.

The ruling party says the current basic system has failed to cover millions of people who are supposed to be paying the compulsory premiums but eventually won’t be entitled to any pension benefits after they retire. This will be a big social problem in the future, the DPJ points out.

Currently, premiums for the kosei-nenkin or kyosai-nenkin are automatically deducted from participants’ salaries.

But among those not covered by either of the two systems, such as people who work part time or are self-employed, more than 40 percent didn’t pay the compulsory premiums for the basic pension system in 2009, the Health, Labor and Welfare Ministry says.

According to the DPJ, the basic pension system should be financed entirely by tax revenue to provide the “minimum necessary benefits” to every person living in Japan.

The Health, Labor and Welfare Ministry has argued that the current system, not one financed by tax revenue, should be maintained. Why?

The ministry has said that under the current system, the link between the right to receive benefits and the obligation to pay premiums is clearer for the public, as it promotes self-reliance of individuals while enabling the public pension system to stably raise revenues to provide benefits to retirees.

The government would also need to secure huge revenue sources to finance all of the costs for the basic pension sys as urged by the DPJ during election campaigns.

According to a 2008 estimate by an expert panel, the consumption tax should be raised to 9 to 13 percent to finance all of the costs of the basic pension system in 2025.

This estimate didn’t include any other rapidly growing social security burdens, such as rising costs in the medical and nursing care insurance systems.

In addition, the DPJ is calling for more spending on welfare measures for children, such as the allowance for child-rearing households, to boost the low birthrate and keep the economy running over the long term.

What is Yosano’s stance on social welfare?

He is a staunch advocate of a consumption tax hike to finance the rapidly growing social security costs, but he also calls for maintaining the current insurance system as well.

“Financing (the basic pension) with an insurance system is a concrete and realistic measure,” Yosano said earlier, pointing out it will take years to implement the DPJ’s pension reform plan to shift the current insurance-based system to a tax-based system.

In a book published last year, Yosano expressed deep concern over snowballing government debt.

He also suggested the consumption tax should be raised to 10 percent by the middle of this decade to finance the growing public costs for the pension, medical and nursing insurance programs, as well as measures to help child-rearing households and boost the low birthrate.

Yosano also lashed out at the DPJ’s economic and fiscal policies, claiming the party is hiding from the need for a drastic tax rise and will eventually “devastate” the economy.

Indeed, the title of the book is “The Democratic Party of Japan will Destroy the Japanese Economy” (“Minshuto ga Nihon Keizai wo Hakai suru”). This is why Yosano, who only recently joined the DPJ-led government as the key economic minister, draws strong criticism from the Liberal Democratic Party, to which he once belonged.

What kind of role is Yosano expected to play in promoting cross-party talks on tax and social welfare reforms?

Yosano, well-known for his thorough knowledge of policy affairs, is believed to have been appointed to handle nonpartisan debate on pension and tax reforms.

After his remark that the current insurance system should be maintained, Kan said at a news conference he won’t necessarily stick with the DPJ’s original plan on basic pensions.

“We will use the DPJ plan as a base, but it is totally acceptable to discuss other options,” he said.

However, experts doubt whether Yosano can be a bridge between the DPJ and opposition parties, given the anger of numerous LDP members over his about-face to join the DPJ.

Yosano left the LDP in April after severely criticizing President Sadakazu Tanigaki for failing to improve the party’s public support rate.