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Monday, Dec. 6, 2010
Trusting the pension system
The government is now paying for 50 percent of basic pension benefits, but on Nov. 29 the Finance Ministry proposed reducing the government portion to 36.5 percent — the level that stood until two years ago — in fiscal 2011 because of a revenue shortage in the general account budget. It proposes using part of the ¥128 trillion reserve fund in the pension special account to make up the difference. Some ¥2.5 trillion was needed in raising the government portion from 36.5 percent to 50 percent.
The ministry's idea is that after making up the difference with money from the reserve fund in fiscal 2011, the government will raise the consumption tax rate and then raise its portion to 50 percent of the pension benefits in and after fiscal 2012. The ministry promises to return the money used from the reserve fund to the pension special account.
The welfare ministry, which administers the special account, is strongly opposed to the Finance Ministry's idea because the latter has failed to live up to a similar past promise. From fiscal 1994 to fiscal 1998, the Finance Ministry used ¥3 trillion from the same reserve fund due to a bad financial situation, yet it has not yet returned the money to the special account.
The amount of the reserve fund appears large, but it is not a pure surplus. The welfare ministry is cutting into it every fiscal year in accordance with a definite long-term plan to pay for pension benefits. The Finance Ministry's proposal will upset the plan and increase the financial burden of future generations.
Public pensions are the most important revenue source for most post-retirement people. The Finance Ministry's idea could undermine people's trust in the nation's pension system. It should use money from the general account budget to pay for 50 percent of the basic pension benefits even if it is difficult to do so, as it will help stabilize the pension system.
The government should be ready to cut other spending in the general account budget to secure a fund to pay for the 50 percent burden. It also should start full discussions on tax reform to ensure long-range stabilization of the pension system.