Home > Opinion
  print button email button

Monday, Oct. 20, 2003

Pension plans on life-support


LONDON -- A flood of articles in the European media recently has warned about the growing problem of paying pensions as the populations of European countries age and birthrates decline. For Japan, this problem looks especially acute.

The British claim that they are in a better position than continental European countries since many of their pensions are funded through company and private schemes involving money invested in bonds and equities. Old-age pensions operated by the state on a "pay as you go" basis (deductions from the earnings of those working pay for the pensions of the aged) are hardly adequate for survival.

While the British birthrate by itself is insufficient to maintain the present population, it is not as low as in Spain and Italy. Moreover, the flow of immigrants into Britain is higher than in most other European countries -- although this is also a cause of social tensions.

Many company pensions, though, show a considerable deficit owing to declines in share prices and inadequate funding. As a result, increasing numbers of companies are closing their defined-benefit schemes to new employees and, in some cases, to longtime workers. Under these schemes, which pay a fixed percentage of an employee's final salary according to the number of years worked, companies have incurred the risk that the funds invested will not be able to meet liabilities. So, the plans are generally being replaced by defined-contribution schemes, which are less costly to the company as the employee bears the investment risk.

These moves are not popular with employees, particularly as employers usually take the opportunity in new schemes to reduce the amount they contribute. But when profits are threatened amid times of stock price volatility, such changes are probably inevitable.

The British government, which is concerned that inadequate savings rates -- especially among lower-wage earners -- won't cover future pension needs, has established so-called stakeholder pensions that qualify for tax rebates and can be taken out by housewives. Still, they have been more popular with those who are better off financially than with poorer people -- for whom they were intended.

The government, understandably concerned about the relative poverty of many retired people and recognizing that the state pension is inadequate, has introduced special tax credits for poorer pensioners designed to ensure that they can maintain a minimum standard of living. But such credits are means-tested and thus involve eligible pensioners in bureaucratic procedures that they may not be able to understand.

Some pensioners are reluctant to apply for such benefits because of the stigma attached to means-testing. There is general agreement that saving for old age must be encouraged, but means-testing is liable to make people question the point of saving. Workers see themselves caught in a vise: They realize that upon retirement their individual savings will not be enough for them to maintain a satisfactory standard of living, yet the very existence of these savings could mean that they cannot claim means-tested benefits.

The aged in Britain face another problem when they are bedridden or unable to care for themselves. They are entitled to free nursing care, but other care is provided only if they do not have the means to pay for it themselves. This may force them to sell their homes and personal property.

The pension issue is increasingly a political one in Britain. The conservatives under former Prime Minister Margaret Thatcher cut the link between a state pension and earnings, and instead tied the amount paid to the rate of inflation. The conservatives now want to reinstate the link to earnings. This is a populist move that appeals to the growing number of pensioner voters who see earnings generally rising but find that they are unable to benefit from the growing prosperity. But it will be difficult to pay for such benefits without increasing taxes -- which the conservatives say they will not do -- or cutting other welfare payments or the National Health Service.

The problem of paying pensions in Europe -- especially in the large countries such as France, Germany, Italy and Spain, where pensions are generally funded on a "pay as you go" basis -- is even more difficult. The problem has been compounded, especially in France and Italy, by the large number of people employed in the public sector, where pensions have been more generous than in the private sector and where early retirement (often at 55) has been commonplace. In France, the problem has been exacerbated by the 35-hour week introduced by the previous socialist government.

It seems probable that pensions will be a hot issue ahead of the Japanese general election on Nov. 9. The opposition parties are reported to be ready to contemplate raising the consumption tax and cutting expenditures on public works to pay for an increase in the basic state pension from one-third to one-half of earnings.

The government is understandably reluctant to mention an increase in the consumption tax at a time when economic growth remains fragile. Prime Minister Junichiro Koizumi is reported to have said, "We will not resolve the pension system problem unless we consider all the issues in a comprehensive way, including where to set premiums and what level of benefits is appropriate."

Of course he is right, but in view of the large number of vested interests involved, it will be very difficult to achieve a consensus. And decisions should not be put off until a crisis forces probably unpalatable solutions.

In general, pensions for which funds have been saved and invested are preferable to pensions funded on a "pay as you go" basis, as the burden on a declining work force is likely to be lower. But the viability of both methods ultimately depends on the productive capacity of the national economy unless, of course, pension funds have been invested abroad in a faster-growing economy and the international payments system remains stable.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


Back to Top

About us |  Work for us |  Contact us |  Privacy policy |  Link policy |  Registration FAQ
Advertise in japantimes.co.jp.
This site has been optimized for modern browsers. Please make sure that Javascript is enabled in your browser's preferences.
The Japan Times Ltd. All rights reserved.