Prime Minister Shinzo Abe has highlighted social security as the domestic system that currently needs reform the most. He appears to feel strongly about accomplishing social security reform as the political legacy of his administration, now the longest in Japanese history. He emphasizes the need for reforming the system for the younger generation in particular, advocating “social security reform for all generations.”
A final report on the planned reform is due this summer, following the interim report released at the end of last year. Expectations are high for social security reform because rebuilding the nation’s fiscal health is impossible without rebuilding the social security system. At the same time, various problems have been pointed out over the planned reform. The interim report discusses the matter in terms of pension, medical and nursing care services, but this article will focus on the pension system to weigh the benefits and problems of the planned reform.
There are two positive aspects of the reform. First, the administration has put the whole Cabinet in charge of the reform, instead of the Health, Labor and Welfare Ministry, to whose jurisdiction the social security reform belongs. Yasutoshi Nishimura, minister in charge of economic revitalization, is tasked to put together draft reform, instead of the health and welfare minister. Unlike the previous National Commission on Social Security, the panel to discuss the reform does not include representatives from industry associations and limits participation by members of the welfare ministry’s Social Security Council to a minimum. Such setup of the panel suggests that the prime minister himself will lead the reform by excluding the influence of interested parties as much as possible.
Second, the discussion has also covered the labor market issues that relate to the pension system. As illustrated by the often-cited phrase “100-year life,” what’s required today is a social mechanism in which people work and earn income longer as their life expectancy extends. In that respect, it is a positive development that discussions are underway to secure job opportunities until people turn 70. As many as 80 percent of people 60 or older currently in employment wish to keep working beyond the age of 70. It is hoped that the uniform distinction between the elderly and the working-age generations would be reviewed and we aim for a society where people can give full play to their potential irrespective of age.
There are some problems, however, in the interim report. First, no discussions appear to have been held over the question of the age at which payout of public pension benefits should start. This is probably because the prime minister has said that the pension benefit eligibility age would not be raised for now. Still, the issue should at least be discussed as a future agenda.
While the life expectancy of the Japanese is among the longest in the world, people become eligible to receive pension benefits at the youngest age among major industrialized countries. As a consequence, men in Japan on average receive pension benefits for 16 years — as opposed to 10 years on average among the advanced economies. Average Japanese women get pension payouts for as long as 22 years. A fundamental improvement in the public pension finances is not to be expected unless this situation is corrected.
Another problem is that the draft reform does not show a clear position on the so-called macroeconomic slide. A key decision in the 2004 reform of the pension system calls for adjusting the amount of pension payouts to the macroeconomic conditions such as inflation and wage increases — as a measure to prevent further worsening of the public pension finances.
In recent years, however, the government has shelved reducing the pension payouts in accordance with price declines under the deflationary trend — exacerbating the pension finances as a result. The planned reform must reflect on this failure and take corrective steps. But, unfortunately, that has not been made clear in the interim report. Rather, the draft reform appears to give a positive appraisal of the fact that people’s income substitution rate — the ratio of pension benefits to the income of working generations — has picked up.
Japan’s social security system is clearly biased in favor of the elderly population. In that sense, greater consideration must be given to the younger generations — just as the prime minister himself calls for reform for “all generations.” An international comparison of social spending shows that Japan clearly spends much more on the elderly than for younger people — the nation spends 46 percent of its social expenditures for the elderly population versus 7 percent on family-related expenses, as opposed to 32 percent versus 15 percent in Britain and 34 percent versus 13 percent in Sweden, for example.
The Japan Association of Corporate Executives (Keizai Doyukai) has released an interesting proposal regarding this issue, calling for an independent organ for assessing fiscal rehabilitation. Specifically, it proposes getting the legislature to show a medium-term estimate for a period of around 10 years and a longer-term projection for about 50 years — based on realistic scenarios on economic growth and other conditions — as separate from the government’s budget formulation each year. This, of course, aims to eliminate optimism in the efforts to improve the nation’s fiscal health and reduce the fiscal burden of future generations. Doyukai’s idea is to set up a committee in the Upper House for estimating and assessing economic and fiscal conditions.
Britain has already set up such an organ. There is criticism that the planned reform will not result in any fundamental overhaul of the system because it avoids such tough questions as raising the pension eligibility age. To answer such a criticism, creation of an independent organ should be considered to verify the reform to see if it works to the benefit of future generations.
Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.