In an audit report for fiscal 2017, the Board of Audit has released a provisional calculation regarding "macroeconomic indexation," which serves as a means of curtailing pension benefits.
The report shows that, if it had been fully implemented after its introduction in 2004, the indexation formula could have reduced the amount of state contributions by a total of 3.3 trillion yen. This calculation will serve as a reference for future pension reforms.
The macroeconomic indexation formula is designed to automatically reduce benefit levels in accordance with the degree of progress in the low birth rate and the graying of society, thereby stabilizing the financial resources for the pension system. It seeks to curb pension payments at a moderate pace by keeping the rate of changes to such benefits within a range in which a certain rate is deducted from price and wage increase rates.
In consideration of objections from elderly people, however, a rule was set out requiring such adjustments to be kept within a certain range that means the nominal amount of pension payments does not decrease. As a result, the implementation of indexation was restricted during periods of deflation and low growth, and indexation was exercised only once in fiscal 2015.
Under system reforms for 2016, the formula was revised so that 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 any large increase in prices. If low economic growth continues, carry-overs will be repeated, undermining the effectiveness of the formula.
Due to the lack of progress in curbing benefits as much as anticipated, the amount of pension payments remain stuck at high levels. This is the cause of a sharp rise in state contributions.
Implement formula in full
In the wake of the low birth rate and the aging population, pension benefit levels are expected to decrease by 20 percent to 30 percent in the future. The current system is designed to provide benefits within the limits of financial resources over the long term, based on a fixed level of premium payments. Delays in curbing benefits would reduce the financial resources for future generations to receive pension payments, and further reduce benefit levels.
To avert such a situation, it is indispensable to fully implement macroeconomic indexation with no regard to the economic situation. The report had every reason to emphasize that it is important to appropriately adjust a benefit level.
The Board of Audit has added social security -- an area that greatly affects the restoration of fiscal health -- anew to the list of items subject to auditing. Although the substance of its assertion can draw no objection, it is a fact that the current system has been stipulated in laws after Diet deliberations. There could be a feeling of unreasonableness about the calculation, which even appears to be a criticism of the policy judgment.
An advisory council at the Health, Labor and Welfare Ministry is making progress in examining relevant issues in preparation for the next pension system reform. The council is expected to put together a report as early as by the end of next year. In-depth discussions should be promoted.
How to scale down a reduction in the level of benefits for future generations is the greatest problem of the pension system. In the last pension reform, the full implementation of macroeconomic indexation was not realized due to strong political objections, despite vigorous calls among council members for that step.
The act of avoiding calls for the current generation to bear the pain and of passing the buck to later generations will make the restoration of confidence in the sustainability of the social security system and fiscal health uncertain. It is important to promote reforms by gaining the understanding of the public.
(From The Yomiuri Shimbun, Nov. 13, 2018)
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