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Monday, Sept. 22, 2003
Dwindling benefits cast doubt on rigid pension and deposit schemes
An insurance policy is an agreement whereby the payment of premiums and the receipt of benefits are inseparable. However, this fundamental principle is now being challenged by the nation's public insurance systems, which are creating anxiety and discontent by gradually denying policyholders freedom of choice. I would like to examine this problem by taking a closer look at the national public pension scheme, whose policyholders are individual Japanese, and the deposit insurance scheme, which is designed to cover our banks.
According to the Social Insurance Agency, the percentage of people who failed to pay premiums into the "kokumin nenkin" pension program hit a record high of 37.2 percent in fiscal 2002, up by 8.1 percentage points from the previous year.
This figure has continued to climb since fiscal 1993, and the agency, in a bid to stop the situation from getting worse, is reportedly considering seizing the assets of malicious evaders. It is also studying a plan to deny people tax refunds on insurance premiums unless they can produce their payment certificates for pension premiums.
Such steps are only natural as long as people are obliged to pay premiums under the law. But the government, which receives the premiums, is also obligated to provide the benefits. We must not forget that an increasing number of people fail to pay premiums because they are skeptical that the state -- or the insurer -- will be capable to come up with the benefits. In fact, the government is already moving to reduce the amount of benefits and raise the age at which policyholders can start receiving them. It's no surprise the younger generation feels concerned that benefits could be suspended in the future.
To dispel such concerns, an idea is being floated that would raise premiums while using tax money to cover the benefits. But before this can happen, the government needs to make the pension scheme more transparent, for example, by disclosing how the premiums collected thus far are being managed, or by clarifying who is to blame for the pension scheme running dry.
It must also be noted that the distinction between pension premiums and tax money is relevant only to the people who collect them. From the viewpoint of those who pay them, pension premiums, which are mandatory and cannot be avoided, are no different from tax payments in that both reduce their disposable income. In dealing with the declining birthrate and the aging population, the government needs to consider undertaking a fundamental reform that would allow competition to exist between the public pension scheme and alternative programs offered by the private sector.
Next, I would like to discuss the deposit insurance scheme for financial institutions.
Deposit insurance premiums, which vary according to the types of deposits covered, are paid on the basis of the total amount of outstanding deposits at each bank. Although the scheme covered all bank deposits in full when it was originally launched, today there is only partial protection -- up to 10 million yen per depositor -- except for deposits designated for settlement purposes. This so-called payoff system has also been extended to time deposits. Even though they know the scheme provides no guarantee for time deposits exceeding 10 million yen, the banks -- and ultimately their depositors and shareholders -- are still obliged to pay the same premiums.
Thus my next question: Why don't premium rates vary?
Basically, the premium is supposed to be set according to the amount of risk gauged at each financial institution. Today, however, the deposit insurance scheme still imposes a uniform rate, as it did during the days of the "convoy" system, when the Finance Ministry used to prevent major banks from failing. It is only natural that the premium for each bank be reviewed in light of its profitability, its outstanding nonperforming loans, and any infusions of taxpayer money that were made to boost its capital base.
Furthermore, the government should consider giving the banks themselves the freedom to opt out of Deposit Insurance Corp. and subscribe to a private-sector insurance scheme, if necessary. The banks could use the savings from not paying deposit insurance premiums to offer a higher interest rate on deposits, giving depositors a greater choice.
Some may argue that charging excessive premiums to banks will help stabilize the financial system. But if that is to be the purpose, the government should instead introduce a tax -- say one intended for financial stability -- instead of charging the extra amount as an insurance premium.
While the environment surrounding the financial sector is rapidly changing, the corresponding public schemes seem rigidly unchanged. The government should know that a system deemed logically invalid in the light of market principles will not be able to change with the times, and push to undertake the necessary reforms.
Teruhiko Mano is an adviser to Tokyo Research International Ltd.