Welfare reform and cost issue

The government’s conference on reform of social welfare spending and taxes, chaired by Prime Minister Naoto Kan, proposed on June 2 raising the consumption tax rate from the current 5 percent to 10 percent in phases by fiscal 2015 to secure stable funds for maintaining and strengthening social welfare. As part of the tax raise, the government is considering raising the tax rate by two to three percentage points in fiscal 2012 at the earliest. The conference also said that the government’s social welfare spending will reach about ¥60 trillion in fiscal 2025. If the amount is to be solely funded by consumption tax revenues, the tax rate must be raised to around 20 percent.

The reform proposal came as Japan is struggling to stabilize the lives of people who have suffered from the devastation caused by the March 11 earthquake and tsunami that hit northeastern Japan as well as of residents of Fukushima Prefecture who have suffered from the spread of radioactive substances from the stricken Fukushima No. 1 nuclear power plant.

Japan also has to reconstruct the areas affected by the disasters. The government must consider a basic concern about the proposed consumption tax raise — whether it is appropriate to raise the tax when the Japanese economy and people are reeling from the damage caused by the March 11 disasters. The proposed tax raise could dampen consumer spending, which accounts for about 60 percent of Japan’s gross domestic product, and spending by business enterprises, thus leading to shrinking of economic activities. A final result could be shrinking of the tax base, which would decrease government revenues.

Because the consumption tax is regressive, the burden on low-income people is larger than that on high-income people. One wonders whether the government has paid enough attention to this problem. It should also consider other measures to raise government revenues, such as a tax on individuals’ income and wealth, and enterprises’ internal reserves.

To improve social welfare, the government proposes introducing a cap on the amount of out-of-pocket payments for medical, nursing and child rearing-related services, increasing the number of professionals engaged in emergency medical treatment and medical and nursing care for aged people staying at home, and cutting the premiums paid by low-income people for health and nursing care insurance. It also proposes shortening the minimum period of years over which people pay premiums for the pension system to become eligible to receive a public pension from the current 25 years to 10 years, providing ¥15,000 a month to pensioners whose annual income is less than ¥650,000, widening the social insurance coverage for irregular workers, improving day-care services for children and changing the amount of the reduction on taxable income.

Together, these measures would entail some ¥3.8 trillion in additional funds in fiscal 2015. But this amount will partly be offset by the following revenue-increasing measures in the field of social welfare proposed by the government and the amount of necessary additional funds will drop to some ¥2.7 trillion in fiscal 2015. Revenues from the one-percentage point portion of the proposed five percentage point raise of the consumption tax will be used to cover the amount. The revenue-increasing measures in the field of social welfare include having people who visit medical institutions pay a uniform ¥100 in addition to their out-of-pocket payments for medical services, reducing the amount of basic pension for people whose annual income is ¥10 million or more, increasing the rate of out-of-pocket payments for medical services by people aged 70 to 74 from the current 10 percent to 20 percent and decreasing the number of hospitalization days for people suffering from life-style related diseases such as diabetes.

The government also proposes considering raising the age at which people start receiving a pension from the current 65 to a range of 68 to 70. (The Japanese Trade Union Confederation of Labor, or Rengo, Japan’s largest labor organization, criticized this proposal as inappropriate because people have difficulty in securing employment up to the age of 65.)

The proposals, as a whole, show that the government is trying to shift the emphasis to improving social welfare benefits for younger generations and low-income people. The government also has shown future concrete changes in social welfare and how much money each change will entail, making it easier for people to calculate the costs and benefits. But people will not have enough time to do that since the government plans to finalize its proposals by around June 20. Both people and local governments, which are directly involved in providing many social welfare services, should be given sufficient time so that they can fully examine the proposals.

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