Commentary / World

Wanted: rational pension reform

by Haruaki Deguchi

The government is required by law to examine the long-term financial health of Japan’s public pension system every five years. In the latest review released last August, it was confirmed that in most of the scenarios considered, the income substitution rate — the ratio of pension payouts to the after-tax income of the working generation — will be maintained at 50 percent or more. This means that retirees will receive pension benefits equivalent to at least half the average after-tax income of the working population.

What was interesting was that, as in the previous review, trial calculations were given on the assumption that several optional measures were taken so as to present policy choices to improve the income substitution rate without raising the pension premiums. The options consisted of expanding the scope of the coverage of the employee pension program, and a combination of having people pay premiums for a longer period (from the current 40 years to 45) and enabling people to start receiving pension benefits later in life (from age 70 at the latest now to age 75).

Japan’s public pension system has two components: the National Pension system (kokumin nenkin), which is designed mainly for self-employed people, whose monthly benefit comes to roughly ¥60,000, and kosei nenkin (employees’ pension), whose monthly benefits are around ¥200,000.

The payout of the national pension is smaller because the system assumes that self-employed workers like owners or former owners of grocery shops, for example, will be able to continue supplementary work at the shops even once they become senior citizens.

There are some 57 million employed workers in Japan. But the employee pension system covers only 44 million of them — mainly full-time regular corporate employees. The other 13 million — mainly part-time workers, who are often in vulnerable positions vis-a-vis their employers — are driven to the national pension even though they are on payrolls.

Expanding the scope of the employees’ pension coverage aims to transfer these 13 million workers from the national pension to the employees’ pension — in line with the principle that employed workers should be covered by employee pension.

It is said the policy is like “killing five birds with one stone.”

First, it will raise the income substitution rate and stabilize the public pension finance. Second, a preferential system for the wives of men covered by the employees’ pension insurance — which, along with spousal taxable income deduction, is contributing to gender discrimination in Japanese society (characterized by the widespread notion that men work outside and women stay home) — will automatically disappear.

Under the preferential system, such housewives are exempt from paying premiums for public pension insurance. Today, however, many housewives hold part-time jobs. If the coverage of the employee pension is expanded, many such women will be covered by the program. Thus the number of housewives enjoying the preferential system will significantly decline.

Third, the policy will add more liquidity to the labor market. In Japan, changing jobs is not easy because of the lingering faith in lifetime employment. One reason behind this is that many part-time workers are not covered by the employees’ pension program. It’s hoped that expanding the program’s coverage to more part-time workers will increase labor mobility.

Fourth, it will make small and medium-sized businesses stronger. Businesses are required by law to pay half the premiums for pension and other social insurance for their employees. Expanding employee pension coverage to more part-time workers will increase the financial burden of the employers, who will then need to earn more to cover the added expenses. Thus the policy will give an incentive for the employers to pursue greater efficiency in the management of their business.

Fifth, it will help solve the problem of poverty among large numbers of elderly people — most of whom used to hold part-time jobs and are now eligible for only the national pension benefits.

There will be no need to explain the advisability of extending the period of premium payments to 45 years and enabling people to start receiving pension benefits at more advanced age (with increased rates of monthly payout) — since these measures are in line with Japanese people’s extended life expectancy.

The trial calculations that reflect these options showed that the income substitution rate will go up by 10 to 11 percentage points if all the measures are introduced. However, the draft reform of the pension system presented by the government at the end of last year will push up the income substitution rate by a mere 0.2 point.

The biggest reason that politicians balked at more radical reforms was the concern that sharply expanding the coverage of the employees’ pension would put too much burden on small and medium-sized businesses and might corner them into bankruptcies.

Such a concern, however, is not backed up by concrete figures. Why can’t the government introduce a rational policy that is believed to bring so much benefit?

I suspect that here lies the key to Japan’s stagnation over the past quarter century. Suppose that some small and medium-size firms go out of business; is that really so bad for the Japanese economy? Or would it make the nation’s economy more robust by letting the zombie companies fail out of the market?

Our predecessors said that employing a person means taking responsibility for that person’s life. I would say that businesses that cannot pay the social insurance premiums for their employees are not qualified to hire people in the first place.

Haruaki Deguchi is the president of Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture. A popular lecturer and author of more than 40 books, he founded Lifenet Insurance in 2008 after a career spanning nearly 35 years at Nippon Life Insurance Co.

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