PROBLEMS IN THE PENSION SYSTEM

Concern about the health of Japan’s public pension system has grown exceedingly serious, so much so that the July 2007 election for the House of Councillors was dubbed the "pension election." This is an issue that needs to be divided into two parts. One is the system’s sustainability. That is, with the number of senior citizens on the increase and the number of children in decline, will the nation’s public pensions remain solvent over the long run? The other is management and operations. Recent debate, sparked by problems in the operations of the Social Insurance Agency, has focused for the most part on the second question. But of greater importance on a fundamental level is the first question of whether the system will prove to be sustainable in a society with a rapidly graying population.

The scandal in the SIA is nonetheless an extraordinary affair, whether one considers the scale of the malfeasance, the length of the period during which the problems were left unattended, or the failure of the mandarins to act in a responsible manner. The two articles we present here make this quite clear. As a result of the improprieties in the pension system’s management, the public has become highly distrustful of the system. To make matters worse, the scandal has caused the government and the opposition parties to postpone debate on what they ought to be seriously considering, which is how to provide the system with a sustainable design and correct the contradictions and distortions in public pension finance.

Population aging is a phenomenon occurring widely around the world, and the issue of pension design has become a matter of concern in all the developed nations. But the aging process is proceeding more rapidly in Japan than in any other major country, and questions of sustainability are therefore more critical. Two factors peculiar to Japan’s case have put the system under additional strain. One is that it is a pay-as-you-go scheme, in which pension benefits for those now in retirement are financed using contributions from the current working-age population, and the other is that many companies and other organizations have a system of mandatory retirement at age 60.

Several years ago the size of Japan’s labor force began to decline, and this initiated an unfavorable trend in the ratio of old-aged people collecting pensions to working-age people paying contributions into the system. The authorities responded with three reforms: (1) increasing the size of contributions, (2) decreasing the level of benefits, and (3) lifting the age at which recipients start collecting benefits in a series of steps. In line with the third policy, the government has required companies to enable employees to continue working from 60 to 63, whether by changing the retirement age or by offering them special contracts. This reform notwithstanding, Japan still pushes its workers into retirement at an earlier age than other countries despite being the world’s leader in longevity. Elsewhere one can find countries that have done away with mandatory retirement altogether by prohibiting companies from restricting employment based only on the worker’s age.

In the absence of changes in Japan’s employment practices and retirement systems, intergenerational inequities will continue to sharpen, and the pension system will gradually become a hollow shell. In his article below, Matsubara Ryûichirô calls attention to the danger of a growing number of people opting out of the public pension schemes altogether. Though he speaks of this as a negative trend among the general population, those who have been removing themselves from the system are predominantly younger people.

As things stand at present, old-aged people receiving benefits and workers who are soon to go into retirement will be able to get back amounts exceeding the total contributions they made over the course of their working careers, but today’s young people have not been guaranteed benefits as large as the payments they will be making. In short, a problem of intergenerational unfairness has arisen. All Japanese are legally required to join the system and start making contributions upon reaching the age of 20, but in fact an increasing number of them are refusing to take part. This may be interpreted as a quiet rebellion by the younger generation.

The government reviews and revises its public pension schemes once every five years. The most recent review occurred in 2004, and the result, we were informed, was a pension system solid enough to last for a century. In fact, however, this supposed 100-year edifice has already begun to crumble. The problem is unfavorable demographic trends. In particular, the birthrate has fallen further than had been officially projected.

The government’s pension overhauls are premised on population estimates provided by the National Institute of Population and Social Security Research. This institute chronically takes a rosy view of the number of children that women will bear in the future. Each time the actual birthrate falls short of its predictions, the prospects for pension finances darken, and the government has to mandate another round of contribution hikes and benefit cuts. The upshot is deepened distrust in the pension system. Critics contend that as a government-affiliated organ, the institute has a penchant to turn out overly optimistic outlooks so as to minimize the impact on existing pension policies.

While the next pension review will not occur until 2009, the institute updated its population estimates at the end of 2006. At that time it was forced to acknowledge that the decline in births and graying of the population have become more critical than it had forecast. As a result, people are already expressing doubts about the future health of pension finances. Even before a full-fledged debate on the system’s sustainability could get going, however, the public’s distrust of and dissatisfaction with the pension system rose to a crescendo. The trigger was the revelation that the Social Insurance Agency had badly botched the management of pension records. As I mentioned at the outset, this became a pivotal issue in the July upper house election.

There can be no doubt that the Social Insurance Agency was extremely careless in its pension management and that the officials running it behaved irresponsibly. Even when a system is rationally designed, a failure to operate it properly will cause the public to lose confidence in it. Among the main problems at the SIA are that many records of contributions have gone missing and that many past pension payments failed to be properly input when an online data system was introduced. But another problem that came into view is that substantial amounts of the funds earmarked for future benefit payments have been used for other purposes, some of them quite questionable.

In his article below, Iwase Tatsuya bluntly accuses the government of perpetrating a scam on the public. He provides details on how the SIA, which is in charge of managing and operating the pension system, has mismanaged and misappropriated funds. For example, the agency funneled pension contributions into the construction of 290 large-scale health centers and resort hotels, creating plush posts in these facilities for its officials to go to upon retiring from the bureaucracy. The SIA built a chain of resort hotels that openly competed with private-sector resort establishments. They incurred such huge losses, however, that they had to be sold off. The sale, moreover, brought in just a few billion yen, whereas hundreds of billions had been poured into their construction. Little wonder, then, that people are using words like misappropriation and scam to characterize the SIA’s operations.

In this situation, two main tasks need to be tackled. First, the problems in institutional operation exposed by the SIA scandal must be remedied. Second, the overall pension system must be redesigned to make it maintainable and sustainable. Action is needed on both these fronts. As I noted, however, the recent debate has focused only on the SIA scandal. The government and the ruling parties have not been giving adequate attention to the second task, and neither has the opposition Democratic Party of Japan, which was the big winner in the upper house election. It appears that all concerned have made a conscious decision to put off debate. Even so, both of these tasks are crucial, and each also needs to be considered independently. If the two get confused and the discussion never transcends emotionalism, Japan will be unable to put together a suitable pension system for its graying population.

As far as the SIA is concerned, the administration has decided that the wisest course is simply to disband it. The current plan calls for replacing the agency with a new national pension institution, which is to be a public corporation not staffed by civil servants, in January 2010. While taking over the job of managing pensions, the new body is to employ a variety of techniques to enhance services and upgrade operations, such as drawing on the efficiency-enhancing, results-oriented methods of the private sector and outsourcing some of the administrative work. In the meantime, the SIA is reportedly implementing a 160-point reform program. But there is still much to be done in the area of enhancing disclosure, transparency, and other requirements of good governance in a public institution. (Kojima Akira, Chairman, Japan Center for Economic Research)

© 2007 Japan Echo Inc.