The future of Japan’s public pension system remains uncertain, and polls indicate the issue is a key concern of voters ahead of Sunday’s House of Representatives election.
But complexities with the pension system leave people with little understanding of what issues are at stake.
The following is a basic overview of the problem:
Q. How is the public pension system structured?
A. The system consists of a national basic pension scheme to cover all workers in Japan, plus an income-linked “kosei nenkin” pension for salaried workers and another, “kyosai nenkin,” for public servants.
Q. What’s the main problem with the public pension system now?
A. Japan’s population is rapidly aging, meaning there will be fewer working-age people to support the swelling ranks of retirees.
At present, four workers aged between 20 and 64 support one person aged 65 or older. But with baby boomers reaching retirement age and fewer children being born, 1.5 workers will have to support one elderly person by 2050.
Experts predict a large increase in premiums to be paid by workers and drastic cuts in benefits for retirees if the pension system is to be maintained.
Q. How serious are the pension system’s financial woes?
A. The system could collapse. As people rapidly lose trust in the system, more and more are refusing to pay the compulsory premiums, prompting experts to foresee doom.
Salaried workers and public servants have no choice but to pay the premiums because they are deducted from their salaries.
But up to 37 percent of 18 million self-employed people and students aged 20 or older who were required to pay the premiums for the basic system did not do so in fiscal 2002. In addition, 4 million others were exempted from the payment due to their low incomes.
Q. Many experts say younger people will not receive benefits worth the value of the premiums they will be obliged to pay. The health ministry claims otherwise. Which is true?
A. It depends on the definition of the premiums and what standard is used to compare their value with the later benefits.
Several government bodies have separately released simulations based on diverse calculations, with totally different and confusing figures.
The Ministry of Economy, Trade and Industry has calculated that pension benefits for salaried workers born in 1980 will amount to 76 percent of the premiums they will have paid over their working life. The figure was reached by calculating the expected future interest gains on the premiums.
The Health, Labor and Welfare Ministry meanwhile claims the pension return rate for a male company employee born in 1995 will be 2.2 times. It compared the premiums and future benefits at their relative value to prevailing wage levels.
But the biggest difference between the health ministry’s and METI’s simulation is in the nature of the premiums.
The health ministry calculation does not include the burden borne by employers, which are obliged to pay a premium amount equal to that of their employees.
Many experts feel the employer burden should be part of the equation, because companies consider the total costs of employing, for example, a male worker, including salary and social security costs.
If the employer burden is included, the return rate in the health ministry’s simulation plummets to just 1.1 times.
Q. What pension reform proposals have the political parties put forward for Sunday’s election?
A. All the major parties agree that the government should increase its share of the public pension burden to half from the current one-third to help stabilize the system. This would cost the state 2.7 trillion yen a year.
The ruling Liberal Democratic Party, however, has not specified in its campaign platform how it will finance such an increase or when the state burden will be raised. Prime Minister Junichiro Koizumi said he will not raise the consumption tax, regarded as a probable tool to cover the cost, while he is in office.
The Democratic Party of Japan said that if it came to power, it would cut down on public works and other wasteful spending practices to cover the costs of raising the government’s share over five years.
As for long-term measures, the LDP has offered no reform plan to cover the rapidly growing pension costs.
New Komeito, one of the LDP’s partners in the ruling coalition, has proposed that pension premiums for salaried workers, including the burden borne by employers, should be eventually raised to 20 percent of their salaries from the current 13.58 percent.
Those workers would receive benefits equivalent to between 50 percent and 60 percent of their average salaries, according to the party’s proposal.
The DPJ proposed a radical plan to integrate all public pension schemes for self-employed workers, salaried workers and public servants into a single system.
The basic benefits would be financed entirely by the government, mainly with revenue from the consumption tax, forcing everyone to pay premiums. Income-linked portions would be financed by premiums, according to the DPJ’s plan.
Experts say that while the DPJ scheme is good in concept, the opposition party had until recently failed to provide any specific benefit and premium figures, claiming there was a lack of data.
The DPJ now says that under its plan, premiums would not exceed 20 percent of income, and benefits would be equivalent to between 50 percent and 55 percent of their average salaries.
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