Sharing the pain across all generations will be essential for preserving the nation’s pension system in an era with a chronically low birthrate and a graying society. A necessary step has been taken in this process.
A pension system reform bill, a major focus of attention in the current extraordinary Diet session, has been passed into law after securing a majority of votes from members of parties including the ruling Liberal Democratic Party and Komeito. The main pillar of this legislation is to revise the rules for determining pension benefits and improve the benefits for future generations.
Each fiscal year, the level of pension benefits will be calculated to match fluctuations in consumer prices and the wages of current working generations. Under the current system, even if wages fall further than consumer prices, pension benefits are reduced only by the rate of the drop in consumer prices. This has been changed under the new law; pension amounts will fall at the rate that wages decline. This step will come into force from fiscal 2021.
Insurance premiums paid by the working generations are the main funding source for pension benefits. The total annual income from the premiums will rise or fall in line with changes in their wages. If wages drop, the balance of payment will deteriorate unless the pension benefits are cut by the same proportion.
We think it is reasonable that falls in wages are reflected in the pension amounts.
The current system fixes the level of insurance premiums, and then scrapes together funds to pay pension benefits from within the range of long-term income accrued from these premiums. Under this framework, if higher pensions are paid to elderly people today, the pensions of future generations will decline proportionately.
Given Japan’s low birthrate and aging society, a future drop in pension levels is unavoidable. To keep this drop to the minimum possible, it is necessary to get elderly people also to tolerate a slight hit in the pocket.
Enhance ‘macroeconomic slide’
The opposition Democratic Party is ignoring this reality and has, from start to finish, launched misdirected criticism by calling it “the pension-cutting bill.” The DP apparently aimed to stir up unease among the public and boost distrust of the administration.
Ever since its days as the Democratic Party of Japan, the party’s nature of turning the pension issue into a political football has not changed.
The pension reform law lacks measures to reinforce the “macroeconomic slide,” which will automatically lower pension levels in response to the low birthrate combined with the growing number of elderly people.
Currently, application of this slide is restricted when the economy is in a state of deflation, so pension benefits levels have remained high. The pension reform law establishes a method under which any cut in pensions that cannot be implemented will be carried over until the following fiscal year or later, and this amount would eventually be deducted together when consumer prices rise or on other occasions.
Under this system, these falls would be continually carried over during a state of deflation, and the system would not function. Even if the pension benefits were deducted later, there would be no option but to pay the higher pensions during the carryover period by cutting into the pension reserves for future generations. We think the macroeconomic slide should be implemented irrespective of the economic climate.
Expanding the range of people eligible to use the kosei nenkin employee pension program is also a task to be addressed. This range was partially expanded in October, but many kinds of part-time workers and others remain excluded. To make up for the decline in the level of the basic pension, the government should consider extending the period during which premiums are paid.
It has been confirmed in fiscal studies on pensions announced by the government in 2014 that these steps will be effective in improving pension benefits in the future. We urge the government to quickly make them a reality.