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News Release

An Evaluation of the 2004 Pension Reform and Issues Still to be Resolved

July 02, 2004

Overview

1. 2004 pension reform lightens burdens but leaves many issues unresolved

The 2004 pension reform deserves praise in that it limits the future growth of the burden of insurance contributions. However, it leaves many issues unresolved, including the absence of any effective measures to prevent the hollowing-out of National Annuities, a lack of consideration for compatibility between the raising of insurance contributions and the economy, the delay in relaxing the conditions on the application of the Employees' Pension scheme to part-time workers and the continuation of the current approach to the operation of pension reserves, notwithstanding the lack of public trust.

The debate in the Diet has failed to dig deep and if anything appears to have taken a step backward. This is clear to see in connection with the problem of National Annuities. The continuation of the current system, with all its many problems, has been endorsed on the basis of a misunderstanding of the status quo. In other words, the government and ruling parties continue to see National Annuities as being for the self-employed, and owing to the difficulty of assessing the incomes of self-employed persons, it was concluded that the defined contributions, etc. of the current system were the best approach.

This session of the Diet has also been marked by the Democratic Party's submission of an independent proposal. The proposal is praiseworthy in that it clarifies the respective roles of insurance contributions and tax revenues, but it leaves a number of fundamental issues unresolved. Among other problems, it is unclear whether the concept of the "minimum guaranteed pension" it mentions is a Swedish-style guaranteed pension or whether it is a basic pension.

As a result of the debate in the Diet, the level of basic pension benefits was cut by 15% without significant discussion by the ruling parties.The Democratic Party has proposed that the basic pension be converted to a "minimum guarantee pension". As a result, no viable alternatives to these two options, such as the expansion and improvement of the basic pension have been put to the Diet.

2. The realities of hollowing-out must be addressed

Today, the self-employed account for fewer than one in four of all potential subscribers to the National Annuities scheme. This means National Annuities can no longer be regarded as a pension system for the self-employed. Its subscribers include self-employed persons, unemployed persons, students, etc. Accordingly, there are few grounds for backing the concept of defined contributions. Moreover, solving the problem of the hollowing out of National Annuities is not simply a matter of increasing the payment ratio. Almost nothing has been done to obtain a quantitative assessment of the hollowing-out of Employees' Pensions. If the scenario calls for continued raising of insurance contributions, care must be taken to ensure compatibility with the economic climate, and the scenario should logically be based on an assessment of the extent of hollowing-out.

There is a gap of 20 million persons between the number of persons covered by pension schemes (excluding civil servants) as estimated by the National Tax Agency's Survey of Salaries and the number estimated by the employee pension system. In theory, between 3.12 million and 9.26 million of these represent the hollowing-out of Employees' Pensions. People defined under the pension system as persons with salary income but not in fact covered by employee pensions are also a problem. Conditions for subscription to the Employees' Pension scheme are ambiguous, the hurdles are by no means low, and the related legislation also presents many problems.

3. Policy Options

Given the reality of hollowing-out of the National Annuities and Employees' Pension schemes and the need to address other policy issues such as eliminating generation gaps, converting the basic pension to consumption tax funding is also a valid option. The experience of other countries indicates that there are many other options.

For example, in the United Kingdom, it was decided in 1999 that national insurance contributions should be levied on the amount remaining after deduction of a fixed sum from wages. This lowered the hurdle for would-be subscribers to national insurance. Similar measures have been introduced for the self-employed. In Sweden, the central government has introduced fiscal measures to ensure that a loss of income or fall in income due to unemployment, child raising, etc. does not impact on the right to receive a pension. If Japan adopts the UK approach, it should be possible, for example to divide self-employed insurance contributions into a fixed-rate element of 6.5% and a fixed-sum element of \8,000.

The current session of the Diet, during which no attempt has been made to establish an accurate picture of current conditions and or to choose appropriate methods presents many problems and should be reflected on in future discussions.

For more information on the content of this report, please contact
Kazuhiko Nishizawa
Economics Department Center for Economic and Public Policy Research

Tel: 03-3288-5052
E-mail:nishizawa.kazuhiko@jri.co.jp

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