Japan’s Finance Minister Taro Aso said the government is considering changes to the pension system that would enable it to cut payments as the nation grapples with the world’s heaviest debt burden.
“It’s true the welfare ministry and related agencies are considering this,” Aso said in Tokyo today when asked about a report in the Nikkei newspaper that the government was weighing the changes. The ministry plans to revise the rules to allow nominal reductions of 0.9 percent a year, regardless of trends in prices and wages, the Nikkei reported, without attribution.
Putting the pension system on a stronger financial footing could reduce the burden on the government, which shoulders half the annual costs of basic pension payments. At the same time, cuts in transfers to Japan’s growing ranks of pensioners, who face rising prices and a higher sales tax, would risk hurting consumption and economic growth.
“The government has to control real expenditure,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former central bank official. “One worry is that consumption among pensioners and people in their 50s and 60s may be damaged as their expectations for real income will deteriorate.”
The changes under consideration would take effect in the fiscal year starting in April next year, the Nikkei said.
Containing social security costs -- which account for 32 percent of this year’s budget -- could help the government check an increase in debt estimated to reach 244 percent of the economy by the end of 2014.
Abe’s efforts to improve public finances have centered on an increase in the sales tax, which he lifted by 3 percentage points in April to 8 percent. Abe is set to weigh a further increase to 10 percent in October 2015, basing the decision on the strength of the economy in the third quarter.
Pension payments are forecast to increase to 60.4 trillion yen in 2025 from 53.8 trillion yen in 2012, as the ratio of the population 65 or older rises to 30 percent from 24 percent over the same period, according to the welfare ministry.
Japan “urgently” needs a fiscal consolidation plan that goes beyond fiscal 2015, the International Monetary Fund said in a statement in May.
“Options include gradually increasing the consumption tax to at least 15 percent, broadening the personal income tax base, and taking measures to contain pension and health care spending,” the IMF said.
Tackling rising social security costs with measures that could limit growth in pension payouts marks a shift in policy that puts the younger generation ahead of Japan’s increasing number of elderly, according to Shirakawa at Credit Suisse.
“This government seems to be more in favor of people in their 20s, 30s, and 40s, rather than those in their 50s and 60s. That means politically the future could be unstable as long as older people have a higher turnout in elections.”
Bank of Japan Governor Haruhiko Kuroda has called on the government to put its finances on a healthy footing.
“It’s an essential precondition for sustainable growth of the Japanese economy to establish a sustainable fiscal structure,” Kuroda told reporters last week. The central bank “strongly hopes” for steady implementation of steps toward fiscal consolidation, he said.
To contact the editors responsible for this story: Paul Panckhurst at email@example.com Arran Scott, James Mayger