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Public pensions, health care stretched as Japan’s population ages

JIJI

Japan is running out of cash to pay for its public health insurance and pension programs. Although credited with underpinning the national success story, the systems are under increasing strain as the population grays.

Membership of the programs is mandatory for residents. They pay premiums and in return are guaranteed public pensions and medical treatment for injury or disease.

Most of the cost of treatment is covered by the insurance programs. This mechanism, launched in 1961, helped to support the country’s rapid postwar economic growth.

In 1950, amid the chaos of the aftermath of World War II, a government advisory council on social security submitted recommendations to Prime Minister Shigeru Yoshida in which it set out a vision of what the medical and pension systems should become.

One pillar, the panel said, would be an insurance system under which citizens share the burden of premium payments to protect against having to pay expensive medical bills and possibly running short of money later in life.

This philosophy formed the backbone of the current social security systems.

The creation of universal health insurance and pension systems got onto the political agenda in around 1955. They were promised by the ruling Liberal Democratic Party, which was formed in that year, and the government accelerated work on the project.

The Diet enacted the revised national health insurance law in 1958 and the national pension law in 1959. The aim was to cover self-employed people, and agricultural and fisheries industry workers who had until then been uninsured.

This led to the launch in 1961 of the universal health insurance and pension systems.

“It was just the right time to establish the systems,” said Kenji Yoshihara, who worked to draw up legislation as a Health and Welfare Ministry bureaucrat at the time and later served as vice health and welfare minister.

As the economy strengthened, social security measures became more generous and pension payments were raised in stages.

The peak came in 1973, a landmark year for social security. In that year, the elderly were exempted from paying out-of-pocket medical expenses, and a system in which pension benefits climbed in line with rises in prices was introduced.

Japan’s rapid economic growth came to halt following the 1973 and 1979 oil crises, its fiscal health deteriorated and the population began aging.

“There was a big difference between before and after the oil crises,” Yoshihara said. “As the government started to run fiscal deficits, the nation began to think that its social security systems would not be sustainable if unattended.”

Accordingly, Japan entered an era marked by greater social security burdens and reduced benefits. Under a law enacted in 1982, for example, the nation ended free medical services for elderly people and instead had them bear part of the costs.

Japanese aged under 70 currently shoulder 30 percent of their medical expenses, while health insurance premiums paid by working generations, which support health care for the elderly, have been rising.

Meanwhile, the public pension premium rate for salaried workers is set to be raised to 18.3 percent of their monthly salaries. This burden will be split equally between employers and employees.

With little room left for raising out-of-pocket medical expenses and insurance premium rates, hopes have grown that consumption tax revenue will become a core support for social security.

This is because consumption tax revenue is less vulnerable to economic fluctuations compared with other taxes and is considered fair as a source of revenue, given that the younger and older generations share the burden alike.

In the 1970s, Mikio Mizuta, then LDP policy chief, visited Europe to inspect national tax systems there, and then Prime Minister Masayoshi Ohira proposed the introduction of a general consumption tax.

Japan introduced consumption tax in April 1989 at a rate of 3 percent. The rate was raised to 5 percent in April 1997 and to 8 percent in April 2014.

Former Finance Minister Hirohisa Fujii, who is well-versed in fiscal and tax policies, said Mizuta and Ohira were aiming to use consumption tax revenue to cover the nation’s fiscal deficits, not to support social security.

However, as social security rose as a proportion of state spending, the government positioned consumption tax revenue as a funding source for social security under a law on integrated reforms of the social security and tax systems enacted in 2012.

The combined value of social security benefits received by Japanese, including pensions, and medical and nursing services, reached ¥109 trillion in fiscal 2012.

As the costs are expected to grow in line with the aging of the society, the government faces a pressing need to balance benefits against premiums, on top of securing sufficient resources.