EDITORIAL: Social security reform

A government council is now intensively debating the integrated tax and social security reform proposed by the administration of Prime Minister Naoto Kan. The Kan administration intends to announce a plan for revamping the social security system in April and then draft a blueprint for the integrated reform incorporating tax increases to finance the social security overhaul.

Reform of the nation's tax and fiscal regime and the social safety net was the underlying theme of the series of editorials we published from October 2007 to April 2008 on proposals to make Japan a more hopeful society.

Immediately after the series of editorials, U.S. investment bank Lehman Brothers collapsed, pushing the world into synchronized recession. The global economic crisis revived deflation--continuous declines in prices and wages--in Japan.

A vision for rehabilitation

A power transfer took place in the United States and then in Japan.

With the nation heading into a future of unprecedented demographic situation due to the aging of the population and low fertility rate, repairing the frayed social security system and mapping out a feasible plan for restoring fiscal sanity is the principal challenge facing policymakers.

The further deterioration of the nation's fiscal health due to stimulus measures taken in response to the economic crisis has increased the urgency for a radical reform of the tax code centering on a consumption tax hike. Such a tax overhaul is an indispensable prerequisite for social security stability.

We would like to add some fresh proposals to the arguments we made in the series of editorials for a hopeful society.

As for reform of the state pension program, it should be based on the current social insurance formula. That would be more realistic than the fully tax-financed system for basic portions, which is proposed by business organizations and Rengo (Japanese Trade Union Confederation), the nation's largest labor organization.

The precious new revenue from tax hikes in the coming years will have to be used mainly to finance programs in such areas as health and nursing-care and child-care support.

Between fiscal 2006 and fiscal 2025, the total amount of health-care and nursing-care benefits will grow by 70 percent and 160 percent, respectively, compared with a 40-percent increase in pension payouts, according to estimates by the Ministry of Health, Labor and Welfare.

In addition to tackling the problems of the shortages of doctors and special elderly nursing homes, the government needs to expand its policy support for families rearing children and people struggling to become financially independent.

Securing a balance between generations

But it is important to ensure financial stability of the pension program. The government has raised the ratio of state financing of the program's basic portions to half, but the step is partly paid for with surpluses and reserves in special budget accounts known as "maizokin" (buried gold) under a stopgap-funding program. The priority should be on securing a stable tax revenue source for the partial state funding of the pension program.

To reduce the number of people who fail to pay into the "kokumin nenkin" national pension program, the "kosei nenkin" plan for corporate employees should be expanded to cover nonregular workers like part-timers and temporary workers. Efforts to collect premiums for the national pension from the remaining nonpayers should be redoubled.

But at the same time, steps should be taken to make certain that all low-income earners will be exempted from premium payments or benefit from premium cuts.

The national identification number system the government is considering is essential for providing welfare services better tailored to the needs of the people. The proposed integration of the kokumin and kosei nenkin programs should be promoted as the effectiveness of the ID number system for efforts to track the income of self-employed workers is ascertained.

Companies should be required in principle to have all employees enrolled in the kosei nenkin program and contribute to the system. It is part of a company's social responsibility to pay its fair share of the cost of social welfare for its employees.

Economic growth is also crucial for the health of social security. Ensuring the long-term financial stability of the social security system requires effective efforts to develop people and industries to create huge additional value for economic growth. The reality, however, is that pension benefits remain at high levels despite stagnant wage growth and a deflationary trend. This situation is causing pension inequality between generations. Fixing the inequity is imperative.

The pension reform in 2004 introduced a system to gradually but automatically lower the levels of pension benefits in response to the aging of the population and the low birth rate. But a provision stipulating that nominal amounts of benefits should be kept unchanged as much as possible has caused the real levels of benefits to rise amid deflation.

As a result, the financial future of the public pension system is in jeopardy. The levels of pension benefits should be lowered in line with falling prices.

Taking a hard look at the dire state of the nation's public finances and recognizing the need to increase the burden on taxpayers is a prerequisite for meaningful social security reform.

Our serial editorials proposed that the state budget be divided into two parts.

One part would finance expenditures crucial for the people's sense of security, such as spending on the health and nursing care, pension and child-care support programs. The additional revenue from future tax hikes would be used mainly to fund these outlays.

The other part of the budget would finance the rest of government expenditures, including spending on debt servicing. This part should be subject to exhaustive efforts for spending cuts through the elimination of waste. We also predicted that Japanese taxpayers would have to brace themselves for a future consumption tax rate above 10 percent.

Virtual cycle of reform and growth

Since the Lehman Shock, Japan's fiscal conditions have deteriorated further. The nation's horrendous fiscal morass is underscored by the fact that on the basis of the original budget, the government's borrowing will surpass its tax receipts for two straight years.

The fiscal management strategy announced by the Kan administration in June last year and the fiscal rehabilitation bill drafted by the main opposition Liberal Democratic Party both call for ensuring that all government outlays, excluding debt service expenses, will be fully covered by tax receipts in fiscal 2020.

But there will be a gargantuan revenue shortfall of nearly 26 trillion yen (about $317 billion) in fiscal 2020 unless nothing is done. That would be equivalent of the revenue from a 9-percent consumption tax.

Filling the budget hole with a tax hike, however, would only amount to this. The cost of the government's services provided in that year would be covered by its tax take in the same year without any fresh borrowing that would increase the burden on future generations.

Welfare states in Europe have been using their revenues from value-added taxes to finance their social security payouts. This approach has won the trust of European taxpayers by convincing them that they will receive benefits in return for the increased burden. In contrast, Japan has been expanding social security benefits without securing sufficient revenue sources to finance them. It is time to fundamentally change this approach.

Much of the fresh money to be raised through a tax increase will have to be used to reduce the government debt. This is necessary for paying for the debt-financed services provided in the past.

The government also needs to make cool-headed efforts to eliminate overlapping services and review the level of benefits.

The new money to spend on social security will come from economic growth. On the other hand, health, nursing and child-care services are a crucial part of the social infrastructure for economic growth. It is important to create a virtuous cycle of social security reform and economic growth.

Laying down a grand vision for the future of social security and taking the first step toward securing revenue sources to finance the system is absolutely vital for rescuing Japan from the trap of stifling stagnation.

--The Asahi Shimbun, Feb. 25