How to make Japan’s social security system sustainable into the future presents a major political challenge that both the government and political parties cannot escape. The rapid aging of the population — by 2025 the youngest baby boomers will have turned 75 — spells trouble for the social security system. While the cost of medical and nursing care services is mushrooming, the working-age population — which primarily shoulders the expenses of social security benefits through tax and social insurance premium payments — is set to decline, raising doubts about the sustainability of the system.
For the past decade or so, the government has grappled with measures to cope with this troublesome demographic scenario. It has pushed for greater efficiency in providing social security benefits while rectifying how people pay taxes and social insurance premiums to cover the expenses. It has also sought to reform the way in which welfare benefits are heavily concentrated on the elderly population and shift more benefits to the younger generations.
The Liberal Democratic Party’s recent campaign promise to achieve social security for all generations toed this policy line. It makes sense to beef up child-rearing support as a measure to address the declining birthrate. However, it is questionable whether making pre-school education and day care services free for children — as Prime Minister Shinzo Abe pledged ahead of the Lower House election — is the right way to go about it. A mechanism based on income is in place to reduce the cost of kindergarten and nursery schools. If such services are made free for all children, high-income households may use the savings to give their children additional educational opportunities, possibly widening the disparity between the rich and the poor.
Making the services free could also intensify competition for admittance to nursery schools, reducing the chances of admission for families that are in dire need of them. Priority should instead be placed on reducing admissions waiting lists by increasing the number of nursery schools and improving the pay and conditions of nursery school staff.
Abe’s idea of diverting part of the revenue from the next planned consumption tax hike — from 8 percent to 10 percent in October 2019 — to cover the cost of the policy is also problematic. By diverting revenue intended to repay government debt incurred by social security expenditures, the prime minister admitted that it will be difficult to achieve the target of achieving a primary budget balance in fiscal 2020 — considered to be a milestone in the efforts to realize fiscal consolidation.
That deviates even further from an agreement reached in 2012 among the LDP, Komeito and the Democratic Party of Japan — which was then in power — that all of the estimated ¥14 trillion in added revenue from the two-stage consumption tax hikes from 5 to 10 percent would be spent on social security, with ¥7.3 trillion of that amount to be used to repay debt incurred by propping up the social security system. The idea was to cut back on debt reliance and reduce the debt burden of future generations. Deferring debt reduction will make it impossible to achieve this goal. The campaign calls by most of the opposition parties to either freeze or cancel the next consumption tax hike — without clearly specifying substitute sources of revenue — were similarly problematic in that respect.
Given the rapidly aging and declining population, many citizens must be feeling insecure about the sustainability of the medical, nursing care and pension systems. Instead of cozying up to voters by promising improved services and benefits, political parties need to offer convincing explanations about how the system can be sustained.
To secure the sustainability of the social security system, the government and lawmakers should not hesitate to discuss increasing the financial burden of wealthy elderly people, raising inheritance taxes, and hiking fees and insurance premiums for medical and nursing care services. They may also need earnest discussions on whether a 10 percent consumption tax will be enough to cover future social security expenses. They should present the people with a comprehensive picture of a sustainable social security system, including both its costs and benefits. Gaining popular understanding will be indispensable if the public burden has to be increased to maintain the system.
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