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Japan eyes overhaul of pensions after payouts predicted to be worth 20% less within 30 years

Kyodo, Reuters

Chief Cabinet Secretary Yoshihide Suga said Wednesday that the government will consider overhauling the public pension system to make sure it is sustainable in the long term, a day after the government projections showed that pension payouts would fall by nearly a fifth in real terms by 2047.

The labor ministry on Tuesday released its long-term projections on the public pension system, estimating the payout level for a “model” household will fall nearly 20 percent in real terms after about 30 years in a standard scenario assuming economic growth and employment.

In its pension estimates — which are issued every five years to gauge the health of public pensions — the government estimates monthly pension benefits at ¥220,000 per model married couple, worth about 61.7 percent of pre-retirement income. That consists of the couple’s basic pension of ¥130,000 and ¥90,000 from the employee’s pension insurance that the husband receives after he retires.

It estimates that this pension-to-wage ratio — the ratio of monthly payouts for a model household to the average net income of the current working population — will decline from the current 61.7 percent to 50.8 percent in fiscal 2047, resulting in a near 20 percent decline in value. The basic pension given out from the National Pension System alone will also see a drop of around 30 percent, the ministry said.

Although payouts will increase to ¥240,000 in fiscal 2047, the net income of future working generations will also rise to ¥472,000 from ¥357,000 now, resulting in a lower replacement rate of 50.8 percent.

The government has said it will keep the rate at 50 percent, indicating the scheme is sustainable as long as Japan sees positive economic growth.

The stability of the current system and possible measures for people with low pension amounts are serious topics for Japan, with the government planning to draft revisions to associated laws within this year.

Concerns about the pension system grew following the release earlier this year of a government panel report that estimated an average retired couple would face a shortfall of ¥20 million under the current scheme if they live to be 95 years old.

Worries are rife that Japan’s ‘pay-as-you-go’ pension scheme may be unsustainable, with fewer workers paying into it and a larger retired population drawing from it.

“In Japan, adjustment in pension benefits and burdens has been lagging, while the overhaul of the pension system has been left untouched,” said Kazuhiko Nishizawa, social security expert at the Japan Research Institute.

To sustain the pension system amid the shrinking working population, the government has introduced a “macroeconomic slide” mechanism, a formula designed to limit pension payment increases to less than the rate of inflation or wage increases.

The Ministry of Health, Labor and Welfare on Tuesday presented six scenarios based on the level of economic growth. In the three optimistic scenarios of high economic growth, a replacement rate in the 50 percent range is guaranteed. In the other three cases of low economic growth, however, the rate will drop to below 50 percent.

In the third standard scenario, which assumes a real economic growth rate of 0.4 percent, the ministry estimates the standard starting age for pension benefits to be 65, based on a model household comprising a couple earning an average single income and contributing to a corporate employees’ pension system for 40 years.

In a scenario where economic growth is 0 percent to 0.2 percent, mechanical adjustments will cause the replacement rate to hover around 45 percent until fiscal balance can be achieved.

If economic growth falls to minus 0.5 percent, reserve funds in the pension system will dry up by fiscal 2052, causing the replacement rate to plummet to below 40 percent.

Curbing bulging welfare spending is a vital step towards fixing the industrial world’s heaviest debt burden, which is currently more than twice the size of Japan’s $5 trillion economy.

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