New Outlook is Needed to Ease Pension Anxiety

the Economic Research Dept.

Ahead of the 2009 financial verification of the public pension system, the outlook for pension finances should already have been worked out by now. Apparently, however, the critical policy debate on contributions and benefits has been eclipsed by the raging controversy of missing pension records.

In the 2004 public pension reform, the standard monthly contribution was slated to rise gradually from 57,000 yen at present (half paid for by employees) to 70,000 yen in 2017, where it will remain pegged. Nonetheless, doubts still surround the public pension’s sustainability because of the looming prospect in which each participant would have to support one pension recipient.

The 2004 reform also introduced a benefit stabilizer called macroeconomic indexation, which would decrease in real terms the current 230,000-yen monthly benefit of the model salaryman household. However, with wages falling, the stabilizer has yet to become operative. Thus as things now stand, benefits are not being trimmed — in fact, the income replacement ratio of benefits is actually rising. With no assurance as to when the stabilizer will take effect or how pension finances will be gapped, the public must live in a state of anxiety about their public pension.

Growing uncertainty over the public pension’s future induces people to curb consumption and save more money today. Moreover, the lack of concrete information generates a risk premium in financial markets. In these ways, pension anxiety has real consequences in today’s economic environment. Instead of postponing the inevitable debate on contributions hikes and benefit cuts, we should take advantage of the current economic recovery to work out a feasible outlook for the public pension.