The pension reform bill that the Abe administration is trying to get enacted during the current Diet session is aimed at holding down the growth of pension benefit payments. The administration says the bill’s grand purpose is to ensure the long-term financial health of the nation’s pension system. But today’s pensioners will likely suffer a decline in benefits. The government has a duty to explain in detail and in an easy-to-understand manner how the bill would contribute to rebuilding the pension system’s finances, which are certain to face difficulties due to the fall in the working-age population — which pays the pension premiums — and an increase in the number of pensioners in this rapidly aging society.
The government’s accountability is all the more important since the public seems largely opposed to the bill. A recent Kyodo News poll found that 58 percent of the respondents opposed the bill against 34 percent in support, although the response varied sharply between generations: Support for the bill was highest — 41 percent — among people up to their 30s and opposition was the strongest — 62.8 percent — among those aged 60 or older.
The opposition parties denounce it as a ploy to cut pension payouts while the government defends it as a measure to secure the pension system’s future. From a near-term viewpoint, the opposition forces are right, but from a longer-term perspective, the government is correct. The problem is that the way both sides are presenting their arguments has tended to fuel the divide between younger and older generations. The bottom line should be for the government and lawmakers to make serious efforts to build a sustainable pension system in which the burden of premiums and benefits are reasonable and acceptable to all generations.
In 2004, the government reformed the pension system so that the payment of future benefits will be made within the bounds of affordable financial resources. It introduced a mechanism called “macro economic slide,” which holds down the growth of benefit payments in the long run and prevents hikes in premiums paid by the future working population.
The slide is a certain rate of deduction in pension benefits calculated by taking into account the drop in the future working population, which shoulders the premium burden, and the increase in average life expectancy, which boosts the number of pensioners. When wages and prices increase by a fairly large margin, the growth in pension benefits will be pared by the deduction rate. When the increase in wages and prices is smaller than the deduction rate, pension benefits level off. When wages and prices fall, pension benefits are reduced by the same margin, with the deduction rate not applied.
Although the government planned to start implementing the mechanism in fiscal 2007, it wasn’t actually applied to pension benefits until fiscal 2015. Had it not been applied, the benefits that year would have increased by 2.3 percent — reflecting price increases in the previous year. But the benefits actually rose only 0.9 percent — because of the 0.9 percent deduction rate under the mechanism plus an additional 0.5 percent deduction to balance out the overpayments made during the years when the scheme was not applied.
The bill now before the Diet introduces two types of measures to bolster future pension finances. The first consists of beefing up the macro economic slide mechanism. When the economy slows down and the growth in wages and prices is smaller than the deduction rate, pension benefits will just level off. But a portion of the deduction rate minus the wage and price increases will be carried over to a future economic boom when the margin of wage and price increases exceeds the deduction rate. In such a case, pension benefits will rise only by a margin equivalent to the wage and price increase minus the deduction rate and the carried-over portion combined. This step will take effect in fiscal 2018.
The second measure changes the rule that determines the level of pension benefits each year. If wages are falling, pension benefits will be lowered accordingly, even when prices are rising. This step, which will enter into force in fiscal 2021, is aimed at having pensioners share the pain of the working-age population caused by the fall in their wages.
While holding down the growth of pension benefits will contribute to shoring up the pension system’s future financial picture, it can also cause difficulties for low-income senior citizens. The government plans to give out a “quasi-welfare” allowance of up to ¥60,000 a year to low-income elderly people beginning in 2019. But that amount will not be enough, given that even those who receive benefits under the basic national pension program in full get only ¥780,000 a year. The pension system reform now in the Diet will be no panacea for strengthening its financial footing. All of the parties involved need to make incessant efforts to bolster the system as well as come up with measures to financially help low-income seniors. Tax increases to finance measures to help these people should not be ruled out.
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