Business / Economy

Consumer spending recovery hampered by pension payment cuts

by Keiko Ujikane

Bloomberg

More than a year after a consumption tax increase tipped Japan into a recession, efforts to clamp down on soaring pension payments are suppressing a recovery in consumer spending.

The problem highlights how difficult it has been for Prime Minister Shinzo Abe to generate a sustained economic rebound for an economy with an aging and shrinking population — amid efforts to rein in a world-record debt load.

Welfare payments have become an increasingly important part of people’s incomes and pensions comprise about 80 percent of cash social security benefits in Japan.

“Any increase in total pension payments may be limited to a gradual rise, relative to the increase in wages and prices,” said Jun Saito, senior research fellow at Japan Center for Economic Research in Tokyo and a former official at the Cabinet Office. “Seniors may have less leeway to spend. That could be one of the reasons why private consumption is struggling to rise.”

The government is raising the age at which people become eligible for retirement income and also is cutting payments in real terms in fiscal 2013 through 2015 to stop overpayments.

The age of eligibility for pensions for workers at private companies will rise to 65 for men by 2026 and by 2031 for women. Sixty-five is already the requisite age to receive the basic national pension. This means less money — and less spending — for those who are looking to join the ranks of the almost 40 million people in Japan who live on retirement income.

Despite the potential impact on spending, pensioners find themselves in the sights of cost cutters because at least in terms of spending power, they were winners as Japan suffered through years of deflation.

Since 1999, benefits were cut less as prices fell, and now the government is bringing them back into line, and is even slowing the rise.

Under “Abenomics,” Abe’s fiscal policies, stock prices have soared and household assets have hit a record, but many have missed out on this “wealth effect,” as they don’t own securities.

The elderly are overwhelmingly dependent on pensions, which may explain why they have been reluctant to spend, even as total assets have boomed.