Pension cuts coming

The government plans to reduce public pensions over three years starting in fiscal 2012, saying that it has overpaid by 2.5 percent. The overpayment has resulted from the Liberal Democratic Party-Komeito government’s decision.

Public pensions are supposed to decrease in accordance with falls in the price index. Although the index fell from fiscal 2000 to fiscal 2002, the LDP-Komeito government enacted a special law to stop the public pension reductions, insisting that the reductions would greatly affect people’s lives. The special law was aimed at currying voters’ favor.

The Democratic Party of Japan government says that because current pensions are paid out of premiums paid by the current working population, overpayment is unfair to them.

Legalistically this argument is correct. But the DPJ has to be careful because pension reductions will not only cause difficulties to low-income pensioners but also reduce overall consumer spending, thus negatively impacting the economy.

According to the health and welfare ministry, the LDP-Komeito government’s decision has resulted in overpayment of ¥7 trillion. The DPJ government plans to submit a bill to the Diet to stop the special measure introduced by the LDP-Komeito government.

To eliminate the 2.5 percent overpayment, the government plans to decrease public pensions 0.9 percent in the last half of fiscal 2012 (from October 2012 to March 2013) and 0.8 percent, respectively, in fiscal 2013 and 2014. But the story does not stop here.

Because the price index fell in 2011, public pensions will start to be cut about 0.3 percent in April 2012. Thus the reduction margin for public pensions will amount to about 1.2 percent in and after October 2012. The 1.2 percent reduction translates into a drop of about ¥800 monthly for a person receiving the full basic pension of monthly ¥66,000 and a fall of about ¥2,800 for a couple receiving standard kosei nenkin pension of monthly ¥230,000 for retired corporate workers.

Since nursing care insurance premiums will be raised in fiscal 2012, the pension reductions will be a fairly strong financial blow to low-income pensioners. The reductions will also apply to victims of the March 11 triple disaster.

If the government just goes ahead with its plan without sufficient explanations and special measures for low-income pensioners, people’s trust in the pension system could crumble.