The Democratic Party of Japan has finally made public its preliminary financial calculations for pension reform it is advocating. Although the DPJ’s proposal is not perfect, both the government and political parties should accelerate their discussions on how to strengthen Japan’s pension system as the graying of the population is rapidly progressing.
According to the National Institute of Population and Security Research, Japan’s population will fall from 128.06 million in 2010 to 86.74 million in 2060. About two out of every five people will be 65 years or older. In 2010, 2.8 people in the working population (those 15 to 64 years of age) were supporting one retiree on average. By 2060, 1.3 people in the working population will have to support one aged person.
The DPJ plan calls for the current three pension schemes — one for corporate workers, one for public sector workers and one for the self-employed or jobless — to be integrated into one scheme. While people will still pay premiums in proportion to their incomes, tax revenue will be used to ensure that everyone receives a monthly pension of at least ¥70,000. To achieve this goal, in addition to the government’s plan to raise the consumption tax rate to 10 percent in October 2015, the tax rate must be raised by 2.3 to 7.1 percentage points, depending on what kinds of people will be covered by the minimum pension of ¥70,000 a month.
At present, the maximum benefit from the basic pension system is about ¥66,000 a month. But in reality, the average amount of benefit being paid from the system is only about ¥49,000. There are also people who are receiving no pension. In view of these factors, the DPJ’s proposed minimum pension plan appears attractive.
But the DPJ’s calculation can change by using different future birthrates. It has also become clear that under the DPJ plan, pension benefits for the middle-class will decrease although the minimum pension will be secured for people with low or no incomes.
The Liberal Democratic Party and Komeito think the priority should be given to modifying the present pension system, rather than to the DPJ’s new plan. But there is a calculation that in 2075, the current system will need additional funds equivalent to a 2.4 percentage point rise in the consumption tax. Both the ruling and opposition blocs need to cooperate to find an optimum solution to Japan’s pension system reform.