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Dire shortfall of social security funds

The Yomiuri ShimbunPrime Minister Shinzo Abe is planning to use the upcoming House of Representatives election to gauge the public’s opinion of his intention to change how increased revenue from the consumption tax hike will be used.

If Abe’s plan is realized, the new spending blueprint is expected to accelerate moves for “human resources development,” such as by making preschool education free. However, implementing these new policies will require money.

The money diverted to these policies could exacerbate the shortage of funds needed to cover the nation’s social security costs, which are swelling as the population grays. This could lead to the issuance of more debt-covering government bonds, which in turn could increase the burden placed on future generations.

The government had previously established how it would spend the about ¥5.6 trillion in increased annual revenue it will receive when the consumption tax rate is hiked from 8 percent to 10 percent, based on the unified reform of the tax and social security systems decided in 2012.

Specifically, ¥1 trillion would be used to beef up the social security system, such as by boosting support for people raising children, ¥4 trillion would be for paying back state debt to ease the burden on future generations, and ¥500 billion would be secured for such purposes as making up shortfalls in the state coffers for the kiso nenkin basic pension system.

However, Abe has now indicated a preference to have the proportion of the extra revenue spent on improving social security programs to be “roughly equal” to the amount used for repaying state debt. Assuming the ¥500 billion set aside for the basic pension and other expenses is left untouched, of the remaining ¥5 trillion, this would amount to ¥2.5 trillion being used for social security — an increase of ¥1.5 trillion.

In contrast, the amount of money used for repaying the government’s debts would be slashed from ¥4 trillion to ¥2.5 trillion.

One policy considered likely to be included to bolster the social security system is making preschool and day care free for children aged from 3 to 5, irrespective of their parents’ income. The Cabinet Office and other entities calculate that implementing this plan would require about ¥730 billion. If the program was extended to cover children from under 1 to 2 years of age, another ¥440 billion would be needed.

There are strong calls for more nursery school facilities to be established so waiting lists for children at such facilities can be reduced to zero. In its budget request for the fiscal 2018 budget, the Health, Labor and Welfare Ministry sought ¥139.7 billion for setting up facilities capable of accepting 90,000 children.

The opposition Democratic Party also has made changing how the extra revenue is spent part of its pledges for the upcoming election, with an emphasis on providing better support for people raising children. The ruling Liberal Democratic Party and the DP agree on reducing the amount of money spent on bringing down the nation’s debt and on increasing expenditures in other policy areas.

Discussions inadequate

At a time when discussions are heating up over how use of the tax hike revenue should be changed, one point tends to be overlooked: How will the government cover the social security costs that are rising year after year?

Bumping up the consumption tax rate to 10 percent is expected to generate ¥28 trillion in tax revenue. However, part of this will be distributed to local governments. The Finance Ministry estimates the central government will have about ¥25 trillion it can use for social security expenses.

The combined major social security expenses — including medical care, nursing care, pensions and child-rearing support — will reach about ¥45 trillion in fiscal 2021. Although the nation’s finances will improve by hiking the consumption tax rate, the about ¥25 trillion in consumption tax revenue that can be spent on social security still leaves a shortfall of about ¥20 trillion. Even if changes are made in how the money is spent, the overall amount of revenue provided by the consumption tax will not change.

Furthermore, halting payments to reduce state debt and also introducing new policies such as making day care and nursery care free will further push up the nation’s social security costs. Ultimately, the shortfall of ¥20 trillion will grow.

The nation’s snowballing social security costs are, in effect, being covered by the issuance of bonds, which is money owed by the government. Given this situation, it is highly possible that the gap between social security expenditure and consumption tax revenue arising from changes in how the money is spent will widen and result in more bonds being issued.

Kibo no To (Party of Hope), a new party led by Tokyo Gov. Yuriko Koike, is considering a freeze on the consumption tax increase, and there are concerns changes in how the revenue is spent could worsen the nation’s finances.

Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd., said the ruling and opposition parties need to discuss how revenue from the consumption tax should be spent.

“Leaving the financial burden hanging over future generations is putting the cart before the horse. They should explain that financial resources that were supposed to be used for curbing increasing debt will be allotted for new expenditures,” Kono said.Speech

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