Public pension reforms

The Health, Labor and Welfare Ministry’s latest report on the long-term estimate of the nation’s public pension finances highlights the need for pension plan reform, including possible extension of the period for paying premiums, so that pension benefits for future retirees will be maintained at levels that can support their livelihood.

Under Japan’s public pension system, payouts for today’s retirees are being covered by premiums paid by the current working population. As the elderly account for a growing portion of the population and the number of working-age people dwindles amid the low fertility rate, cuts to the level of pension payouts for retirees will become unavoidable unless premium payments by workers are allowed to keep rising. The question is how can the cuts to payouts be minimized.

The 2004 reform of the public pension system set an upper limit on future increases in premium levels, and the actual payout levels will be automatically adjusted within the limit according to demographic conditions. The government pledged that monthly pension payouts for future generations will be kept at 50 percent or more of the average after-tax income of the working population, and required the health ministry to compile estimates every five years of the fiscal condition of the pension program over the next 100 years to see when reforms of the schemes become necessary.

The latest estimate released on Tuesday showed that under the ministry’s standard scenario for economic growth and demographic trends, the ratio of monthly pension payouts for a model household to the average income of the working population will gradually drop from 62.7 percent in fiscal 2014 to 50.6 percent in 2043 and remain fixed at that level in the years beyond — barely above the promised 50 percent.

Future conditions of the public pension system will vary according to the nation’s economic conditions. If the economy grows and people’s wages rise, premium revenues in the pension scheme for corporate employees will increase, and payouts to the retirees will also increase if wages and prices are on the rise. The welfare ministry’s standard scenario assumes 0.4 percent real growth in Japan’s gross domestic product over the long term, with wages increasing by 2.5 percent — faster than the 1.2 percent rise in prices.

Pension finances will be in a much better shape under its more optimistic scenario, while in its worst-case scenario the payouts to retirees will ultimately fall to around 35 percent of the average income of the working generation.

But aside from future economic conditions, a mechanism introduced in the 2004 reform will reduce the pension payout levels as the size of the working-age population falls and people’s average life expectancy increases. The mechanism, called a macroeconomic slide formula, is not activated while prices and wages are falling, but is expected to kick in for the first time next year. Thus the payout level is forecast to drop roughly 20 percent over the next 30 years.

The cut is estimated to be even steeper for self-employed people and irregular workers not on the pension scheme for corporate employees. There is concern that these people could be discouraged from paying into the system if their future benefits are too low.

Steady growth of the economy will of course be vital for stability in the public pension system. But other means should also be explored to minimize the fall in payout levels.

In the latest report, the welfare ministry gave an optional scenario in which people pay premiums for the basic pension scheme from the age of 20 to 64, instead of from 20 to 60 under the current system.

People will need to pay the premiums over a longer period, but the estimated fall in the payout levels will slow. The ministry also included an estimate that the pension finances would improve by allowing more part-time workers to join the pension scheme for corporate employees.

These and other steps should be considered as part of efforts to sustain the public pension system’s purpose of supporting people’s lives in retirement.