Japan's National Pension Trapped in the 'Swamp of Aging'

[Seoul Economic Daily · Op-Ed · March 28, 2012]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA)

Currently in Japan, the issue of overhauling the National Pension—a Basic Pension paid to all older people (which differs from Korea's National Pension)—is a heated topic. This is because the older population has surged, leading to high pension expenditures, while government finances to cover them are woefully insufficient.

The Japanese pension system originated from the German model. The German pension system, known as the Bismarckian type, is a typical earnings-related pension characterized by a structure of "contributing more and receiving more." However, as low growth became entrenched and life expectancy extended, causing the older population to surge, maintaining the system has become difficult. In this similar situation, examining how Germany and Japan are responding likely offers significant implications for the establishment of our own old-age income security system.

Germany, the origin of the Bismarckian pension system, rushed to resolve the issue when red flags were raised regarding sustainability due to increased social security burdens. The person who stepped forward as the problem-solver was Chancellor Gerhard Schröder. Perceiving the severity of the problem, Schröder promoted "Agenda 2010" and focused all efforts on strengthening the social safety net and increasing labor market flexibility to compensate for drastic cuts in pension benefits. Such reform brought disastrous results for Schröder personally. The Social Democratic Party, his traditional support base, turned their backs on him, and power passed to the right-wing Chancellor Angela Merkel.

However, the return that Germany reaped at the national level was enormous. A clear example is that Germany's unemployment rate actually decreased even after the 2008 global economic crisis. Curious about how Germany's national competitiveness increased after the economic crisis, the United States published a special feature on Germany in the Washington Post last September.

Struggling to cover even 50% of expenditures from the national treasury

The response of Japan, a longevity superpower whose population is already declining, is moving in the opposite direction of Germany. While it has been passive about the integrated operation of the Employees' Pension Insurance (an earnings-related pension) for the general public and the Government Employees Pension—which had been pursued since the time of Prime Minister Junichiro Koizumi—it is active in introducing a minimum guaranteed pension system that covers all pension funding from the state's finances to alleviate anxiety about old age. This is despite the fact that the National Pension, paid to all older people, cannot cover expenditures with contribution revenue alone, and since 2009, it has been mandated to procure 50% of expenditures through taxes, yet Japan is agonizing over its inability to secure these funds. The special account surpluses (the so-called "buried treasure") that the Japanese government temporarily used starting in 2009 to cover pension expenditure were already depleted by the end of last year.

Therefore, the methods of securing funds available to the Japanese government are to immediately raise the consumption tax rate, currently at 5%, or to issue government bonds on the condition that they will be repaid through future tax increases. However, these have not been implemented because the opposition parties object. This is why the Japanese government's concerns are deepening.

A minimum guaranteed pension reduces or entirely eliminates the amount payable (at a level of 70,000 yen per person per month) for older people above a certain income level; however, unlike the National Pension, it requires funding equivalent to "consumption tax revenue at a 7% rate" in the long term because all funds are covered by the state's finances. It is a system that costs far more than the current total consumption tax revenue (at a 5% rate). This is why many opinions are critical of its introduction, arguing that the scope of beneficiaries and the benefit level are beyond what the Japanese government can handle.

If Japan is experiencing such great difficulty due to low fertility and aging, what will our future be like? Is it a situation where we can feel secure?

We must also derive an overhaul plan for the pension system

I wonder if we are properly prepared to navigate the fierce wave of population aging, which is overwhelming even Japan, a country with strong manufacturing competitiveness and massive domestic and foreign assets. In a situation where securing an old-age income safety net for impoverished older people due to rapid population aging is urgent, no meaningful solution was derived despite discussions on pension overhaul at the National Assembly level last year. This is why it is urgent to form a social consensus on how to establish the old-age income security system to cope with the unprecedented new world of a super-aged society that lies before us.

Source: Seoul Economic Daily (original article)