Political parties are bracing for a new round of joint parliamentary panel talks on social security reform. The biggest issue is how to integrate disparate and unequal parts of the public pension system. Prospects for final agreement look uncertain at best, given the wide differences that exist between and among the ruling and opposition parties. To produce results, they need to tackle practical issues first, rather than stick to hard and fast principles.

Efforts toward pension reform are already taking concrete shape. Effective Friday, when the new fiscal year started, the premium on national pensions was increased by 280 yen to 13,580 yen a month on the basis of the reforms agreed upon in 2004. Premiums paid by corporate employees, civil servants and private school teachers have already been raised.

If the 2004 reforms proceed according to plan, premiums will gradually keep rising until 2017, while benefit levels will be adjusted according to changes in the work force, average life expectancy, wages and prices. That appears to be the easy part compared with what yet needs to be addressed: securing pension revenues and removing systemic inequalities.

The fundamental question is how to create a sustainable pension system. There is no quick fix. The system, largely a function of economic and fiscal policy as well demographic trends and changes in lifestyle, must be designed from a long-term perspective. To be eligible for national pensions, for example, one must continue to pay premiums for 25 years, but it is extremely difficult to predict what the economy will look like 25 years down the road.

Experts point out that a sustainable pension system must meet three requirements: First, it must have a simple structure that is easy to understand. Second, it must be fair. And third, it must be based on a reasonable funding program.

The 2004 reforms are based on the premise that existing pension programs will be maintained separately. These involve (1) kosei (welfare) corporate employee pensions, (2) kyosai (mutual aid) pensions for civil servants and private school teachers, and (3) kokumin (national) pensions for self-employed people and others. Systemic differences exist in premiums, benefit levels and reserve management.

Funding is the most important issue. The 2004 reforms call for an increase in the government share of contributions to the basic (national) pension fund from one-third to one-half. Extra revenues are to be raised through tax increases. That may not suffice, given the steady rise in the number of pensioners. Prospects for a higher consumption tax — an option being considered by the ruling parties — remain clouded.

The opposition Democratic Party of Japan is pushing for an integration of the three programs. According to its plan, modeled on the Swedish system, pensions would be paid in proportion to incomes under a simplified system funded partly by revenues from the value-added tax.

The DPJ plan has three features. First, pensions would vary with income-proportional premiums — a formula similar to the kosei program. Second, minimum pensions would be guaranteed for low-income people. And third, the consumption tax would be raised to pay minimum pensions.

The question is: Will the plan work? The DPJ initially proposed an increase of three percentage points in the consumption tax rate, now at 5 percent. Some members now call for a rise of five percentage points. A still-higher increase may become necessary, depending on future demographic and economic changes.

The DPJ plan raises another difficult question: How to keep tabs on the incomes of self-employed people. The party says the problem can be resolved by introducing a taxpayer number-identification system. Forging a consensus on this score may be difficult, however, as many members are opposed to such a system on grounds of privacy violation.

Another perceived problem about an income-proportional pension system is that self-employed people, one way or another, could become subject to sharp increases in premiums. In the case of the kosei and kyosai programs, one-half of the premiums are paid, respectively, by either employers or government (central or local).

The Liberal Democratic Party is in favor of integrating the kosei and kyosai programs — which combine basic and income-proportional pensions — so that it is possible to adjust differences in premiums and payouts.

An overall integration that includes the kokumin program should be the ultimate goal of the joint panel. As a first step in that direction, it should map out plans to combine the kosei and kyosai programs. That would be a practical way to address the public’s deep mistrust of the pension system.

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