Tax hike small change in senior-care dilemma

by Chico Harlan

The Washington Post

The ominous demographics of aging Japan have long been seen by the people as a distant concern, not a present-day one. But that mindset is being called into question by a prime minister who says a crisis requiring immediate sacrifices has already begun.

In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund the nation’s soaring social security costs.

And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger nearly 4 to 1.

Economists and government officials say Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.

Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.

And that’s the best-case scenario, experts say, possible only if a notoriously fractious government succeeds in pushing through a series of unpopular measures.

Decades of good policy “can avoid a crisis,” said Masatoshi Katagiri, an economist at Chuo University, but living standards will erode. “Either way,” he said, “it will be gloomy.”

After it became an economic power after World War II, Japan created a generous social security net, with a universal pension system, in which people were covered as employees or via a basic national program, and a universal health-care system. But since the collapse two decades ago of the real estate and stock market bubble, the foundation of that system has started to crack. Tax revenue has dropped amid deflation, forcing Japan, already the world’s most debt-burdened country, to fund its social programs with more and more borrowing.

Meanwhile, Japan must come up with more and more money. This year, Japan will devote about 29 percent of its ¥90 trillion budget toward social security, its greatest single expenditure. Every passing year, according to government projections, Japan will need to raise an additional ¥1 trillion as it becomes the world’s most top-heavy society. All while the workforce shrinks in this country of 127 million.

“The ground on which social security stands is now shaking,” Noda said at a town meeting here this month.

Government officials have held a series of such meetings across the country, but Noda delivered the pitch here in Nishinomiya, a town wedged between the Osaka-Kobe industrial heartland.

Speaking to an audience of 200, Noda said Japan needed to double its consumption tax by 2015, a move critics say could stall a tenuous economic recovery.

Noda described the problem in visual terms. In 1965, there were 9.1 workers for every retiree, and the social security system, he said, operated like a “douage,” a sports celebration where a team tosses the coach into the air. By 2050, though, two in every five residents will be 65 or older, with one worker for every retiree, meaning those celebrations will look instead like “kataguruma,” or piggyback rides.

“It becomes really tough for the person at the bottom,” Noda said.

The nation has long avoided major social reforms due to reluctance to mess with a system that they credit for their health. (life expectancy at birth is 83, the highest in the industrialized world, according to the Organization for Economic Cooperation and Development.)

Modest changes came in 2004, when the government nudged up premium rates for its employee and national pension programs. But experts say that more — much more — should have been done.

At that time, policymakers came up with an idea to keep pension benefits from getting out of hand. They drew up a formula that essentially connected workforce size with pension payments to retirees. As one shrank, so, too, would the other, keeping the system sustainable as the population aged.

But the formula had a catch. It would be triggered only by an economic benchmark that required inflation. Years of subsequent deflation have prevented Japan from meeting that benchmark.

As a result, the formula has never been activated.

“We should have already been seeing this downward adjustment” for years, said Noriyuki Takayama, an expert at the Tokyo-based Research Institute for Policies on Pension and Aging. “So we have this aging population, and we still have no good answer on how to deal with it.”

In Nishinomiya, Noda made his 20-minute case that a tax increase was the first step to confront the problem. He said the country is “at a crossroads.” And then he opened the floor for questions.

A few seconds passed.

Then a 20-year-old college student, Naoki Kakuta, raised his hand and asked whether there would be ways to reduce the burden on his generation.

Noda answered that it would be unfair to “forever” raise the pension premium, as the burden should be shared, not channeled toward those with jobs.

But the answer didn’t quell Kakuta’s concerns.

Kakuta knew first-hand about generous benefits of the social security system because three of his grandparents were still enjoying them. His surviving grandfather, Sueo Uemura, retired 20 years ago from the regional electricity company, living with his wife on pension and savings ever since.

Kakuta said he didn’t think the cutbacks to the system were coming fast enough. And he doubted the ability of politicians to draft the right policies.

“To me,” he said, “it sounds more and more like we’re passing this on to the younger people. . . . I feel especially bad for the generation after mine. And that certainly doesn’t motivate me to have more children.”