Pensioners will feel the financial pinch more in fiscal 2015 because the increase in pension benefits will likely be kept lower than the rise in general prices due to the introduction of a mechanism to push down the growth of pension payouts.
The government needs to take extra steps to support the livelihood of those pensioners who get less benefits than others in the first place due to various reasons.
The nation’s dwindling birthrate coupled with its aging population is exerting great pressure on the public pension system. Since the average life expectancy is lengthening, the total amount of pension payments is on the rise.
The demographic trend, however, is showing a decline in the number of premium-paying participants in public pension plans, thereby weakening the pension system’s financial footing.
In principle, the increase or decrease in pension payments is linked to price movements. For example, if prices fall by 1 percent, pension payment amounts are supposed to fall 1 percent. But the current demographic and economic conditions are such that there are not enough funds to meet even the reduced pension payments.
To finance the payouts, pension schemes are digging into reserve funds. But it is clear that this practice cannot continue indefinitely; the nation’s public pension system will collapse at some point unless something is done.
The government and the ruling coalition are now considering putting into force a pension payment adjustment mechanism that will take into consideration not only price movements but also the decrease in the number of participants in the public pension system and the lengthening of life expectancy. The mechanism was introduced in 2004 but has so far not been in force because it was to be implemented only when prices were rising.
Under the mechanism, the pension payment reduction rate will first be calculated on the basis of the falling number of participants and longer life expectancy. If the inflation rate is 3 percent and the reduction rate is 1 percent, the pension payouts will go up by only 2 percent, instead of 3 percent.
An estimate by the Health, Labor and Welfare Ministry for fiscal 2015 shows that the reduction rate will be 1.1 percent. Since the price index rose 2.1 percent in the first half of 2014, the benefit for each pensioner for fiscal 2015 will rise only 1 percent.
The story does not end here. Pensioners will start feeling the consequences of the Liberal Democratic Party-New Komeito government’s decision more than a decade ago not to reduce pension payouts for three years from fiscal 2000 even though prices were falling due to deflation.
The two parties were fearful of pensioners’ reactions to cuts in the amount of benefits they received. The coalition skipped cuts to pension payments totaling 2.5 percent over the three years — a decrease that would have been made if the indexation rule had been strictly followed. In other words, they overpaid pensions.
To make up for the overpayment, the government now plans to cut payouts by 0.5 percent in fiscal 2015 — in addition to the 1.1 percent reduction due to demographic reasons — for a total 1.6 percent reduction. Thus the amount of pension payouts will rise only 0.5 percent even though prices have risen by 2.1 percent.
To contain the amount of pension payouts, the government reportedly plans to seek legal amendments so that the mechanism to link the payout levels to demographic changes can be put in force when prices are falling as well.
Both the ruling and opposition parties should make efforts to reach a rational decision. While the financial health of the public pension system must be sustained, lawmakers should not forget that the planned cuts will severely hit elderly people who receive only a small amount of benefits. Special measures should be taken to help them.
Over the long term, the government needs to try to increase the number of participants in public pension plans by taking steps to expand and stabilize employment. The government should note that its policy facilitating the expansion of irregular workers is undermining the public pension system.