It is essential to maintain pension payments that support post-retirement life in the future as well. Doing so absolutely requires sharing the pain across all generations.
It has been decided that the amount of pension benefits to be given in fiscal 2019 will be increased by 0.1 percent from the current fiscal year. Although the move marks the first hike of its kind in four years, the increased rate entails a reduction equivalent to 0.5 percent from the rate that should be properly set, in keeping with changes in prices and wages. This will cause a decrease in the real value of pension payments.
The curb in pension-benefit increase is due to the implementation of macroeconomic indexation, a mechanism with which to reduce payment levels in accordance with the progression in the low birthrate and aging population.
This setup was introduced in the 2004 pension reform as a device for stabilizing the pension financing system. The mechanism is designed to lower pension-benefit levels at a moderate pace by keeping the rate of changes within a range in which a certain percentage is deducted from the range of fluctuations in prices and wages.
The increase in pension recipients will be accompanied by a continued decrease in the working generation who pay pension premiums. Curbing pension benefits is inevitable for preventing a collapse of the pension system.
The latest decision will probably be seen as harsh from the perspective of elderly people. It is important for the government to carefully explain the purpose of the system and gain their understanding.
Although macroeconomic indexation has an important role to play, it has a major defect.
In consideration of objections from elderly people, the mechanism entails a rule that requires payment-level adjustments to stay within a range in which the nominal amount of pension benefits will not be reduced. This restricts the implementation of the setup at times of deflation and low growth, and the latest decision only marks the second time such an adjustment will be made.
Due to delays in curbing payments as much as anticipated, the current amount of benefits has been stuck at a high level. Obviously, the mechanism has fallen into malfunction.
Fully implement curbs
Because of the low birthrate and the graying population, future pension-payment levels are expected to drop 20 percent to 30 percent from now. The current system is designed to keep premiums at a fixed level and anticipate premium revenue from a long-term perspective, thereby providing benefits within that range.
If benefits given to current elderly people exceed an estimate, it means a reduction in the financial resources for payments to future generations and further cuts in benefit levels. That will increase a sense of unfairness felt among the younger generation.
It is important to abolish restrictions on the application of macroeconomic indexation and fully implement the setup with no regard to economic conditions.
Although such measures were considered in the last system reform, it was decided the idea would not be adopted due to strong anxieties among the ruling parties about its possible influence on elections.
Instead, a formula was introduced in which portions that were not subject to reductions would be carried over to the next fiscal year or later, deducting a lump of such portions at the time of an economic upturn. If low economic growth continues, however, carry-overs will only be repeated. The effectiveness of the method is questionable and quite inadequate.
In the next pension reform scheduled for 2020, the formula must be reconsidered without fail.
It has been announced that there was a loss of about 15 trillion yen in the performance of pension reserve management during the October-December period in 2018. On the other hand, a cumulative surplus in that fund stands at as much as 57 trillion yen. The reserve fund is based on the assumption of long-term management and so the latest loss will not immediately impact pension financing. It is advisable to avoid discussions that will unnecessarily stir distrust in the system.
(From The Yomiuri Shimbun, Feb. 3, 2019)
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