Behind the Scenes / Pension financing improvements lagging

The Yomiuri Shimbun

By Hiroshi Ishizaki / Yomiuri Shimbun Senior Writer Starting in the new fiscal year, the pension payments that senior citizens currently receive will fall by 0.1 percent. In spite of this, pension financing continues to deteriorate, creating conditions for pensions to possibly decrease further for future generations.

Link with prices

On Jan. 27, the Health, Labor and Welfare Ministry announced a decrease of pension benefits for employee pensions and the national pension (basic pension) in fiscal 2017. With the consumer price index falling last year by 0.1 percent, payments were reduced accordingly. The pension benefit for a model household under the employee pension in fiscal 2017 will be ¥221,277 per month, ¥227 less than in the current fiscal year.

Meanwhile, in December last year, the Diet passed a pension system reform law in order to avoid the deterioration of pension financing due to deflation. The bill has yet to be implemented, and therefore does not affect this year’s revision. But what would have happened if the new rule had been implemented?

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Link with wages

Under the current system, even if the wages of current working generations fall further than consumer prices, pension benefits would be reduced only by the rate of the drop in consumer prices. However, under the new rule to be implemented in fiscal 2021, pension amounts will fall at the rate that wages decline, rather than the rate of the drop in consumer prices.

The public pension system is supported by the insurance premiums paid by working generations. If the wages of working people decrease and the pensions of seniors are not decreased accordingly, this will upset the balance between them, resulting in the deterioration of pension financing. The new rule comes as a repercussion of the deterioration of public finances. Its goal is to prevent the future pensions of the younger generations from decreasing.

This revision applies specifically to cases such as this: Last year, prices fell by 0.1 percent, and the rate by which wages fell was a much wider margin of 1.1 percent. However, in accordance with the existing rule, the reduction to pension amounts was confined to 0.1 percent.

If the new rule is to be adopted, the reduction for a model household would be around ¥2,000 per month. The amount by which the new rule was not applied will need to be paid for in the future.

Macroeconomic slide

There are still other causes for the deterioration of public finances. The “macroeconomic slide” lowers benefit levels in keeping with Japan’s decreasing birthrate and aging population. However, it could not be implemented in the new fiscal year.

Once this system is implemented, pension payments will only increase by a given rate minus an “adjustment rate,” even if prices rise. The aim of the system is to economize on benefits and stabilize public finances.

However, it has been decided that this rule should not be triggered during periods of deflation. Since the introduction of pension reform in 2004, the rule has only been implemented once, in fiscal 2015.

One further element was added to the reform law. During times of deflation, an adjustment rate that could not be applied in one year will be carried over from the following fiscal year. Then, when prices see an upturn, the cumulative adjustments can be made in one fell swoop.

This amendment is slated for implementation starting in fiscal 2018 and has not been adopted at present.

The adjustment rate for deductions that should have been made in the new fiscal year was 0.5 percent. With respect to the model household, this would have been about ¥1,000 a month. Postponing benefit cuts will cause the deterioration of public funds to increase even more in the future.

Concerns over deflation

The benefit levels of public pensions will be lower for generations yet unborn. However, according to preliminary calculations by the ministry, it is said that if the new rules for pension reform had been implemented 10 years earlier, the benefits of the basic pension for people who are in their 30s or younger today could have been increased by ¥5,000 per month. It cannot be denied that reforms are lagging.

What’s more, even if the reform law is enforced, if deflation continues for an extended period, there is a chance that it will not be possible to implement the macroeconomic slide. “We need a mechanism that will not allow the reduction of benefits to be postponed, such as by deducting the adjustment rate even during deflation and by unequivocal implementation” said Kazuhiko Nishizawa, a chief senior economist at the Japan Research Institute, Ltd. think tank.

On the other hand, it is crucial to address seniors whose pensions are expected to be too low. There is an urgent need to discuss reform.

(From The Yomiuri Shimbun, Feb. 1, 2017)Speech

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