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Friday, Jan. 14, 2011
Tax hike not question of if, just how
Benefits for younger generations said key to social security's future
Working mother Gudrun Skuladottir appreciates her life in Sweden, where her two small children can receive a good education for free.
"In Sweden, schools are free. University is also free," Skuladottir, 29, who works on a bank management support team in Stockholm, said in an e-mail message.
Unlike in Japan, parents in Sweden don't have to wait to put their children into day care because there's no shortage of facilities. "I definitely feel like I'm benefiting from the social welfare," she said.
Helena Ejdersten, 30-year-old recruitment consultant who also lives in Stockholm, agreed.
She appreciates the Swedish welfare system even more since she had children because it gives her the opportunity to balance work with child-rearing.
Ejdersten said a parent can leave the workplace to take care of a baby for up to 480 days, receiving 80 percent of their salary for the first 390 days. "So I was at home for nine months and my boyfriend for seven months with (my daughter)," she said.
Those benefits, however, are provided by a 25 percent value-added tax and a 30 percent tax deduction from employee paychecks.
Sweden's tax and welfare model may not be one Japan is ready to adopt, but the ruling Democratic Party of Japan is seriously probing ways to make its own social welfare system more sustainable as the population rapidly grays.
Prime Minister Naoto Kan made it clear during his New Year's press conference Jan. 4 that he wants to form a nonpartisan body to study social welfare and tax reform — including a consumption tax hike — and come up with a concrete plan by June.
"It is obvious that we need to discuss the social welfare system, the revenue that is required and tax reform," Kan said.
While admitting the importance of raising taxes to secure more revenue for social welfare, no leader had dared touch the unpopular issue of hiking the 5 percent sales tax.
Kan briefly raised the possibility of doubling the consumption tax to 10 percent after taking power in June, but was forced to back off that position after the DPJ-led ruling bloc lost its majority in the Upper House election the following month.
"The government's responsibility is big. It has been postponing the discussion to solve the problems," said Katsuhiko Fujimori, manager and chief research associate of social policy at Mizuho Information and Research Institute. "The government is responsible for explaining and convincing the people why (higher taxes and social insurance contributions) are needed."
The Japan Business Federation (Nippon Keidanren) has also pushed for raising the consumption tax. While the powerful business lobby is traditionally antitax, it has shifted to the concept of "middle-level social security by a middle-level burden," according to Masakazu Kubota, a senior managing director at the group.
"We acknowledged in 2008 that establishing a sense of security for citizens is crucial for sustainable economic development," Kubota said at a DPJ study session on tax and social welfare reform in November.
Keidanren hopes a solid social welfare system will help create conditions for improving the birthrate, which will in turn spur economic activity, he said.
To do that, the government must raise the consumption tax because its level of tax revenue to gross domestic product is one of the lowest among its peers in the Organization for Economic Cooperation and Development, Kubota said.
"We think it's better to implement a tax increase as soon as possible, but gradually up to 10 percent, and we hope all political parties join the discussion on tax reform," he said.
At first glance, Japan appears to be spending a hefty amount on social welfare.
According to the National Institute of Population and Social Security Research, about ¥91.4 trillion, or 19.15 percent of gross domestic product, was used to provide social welfare benefits in fiscal 2007.
But Japan's spending on social welfare as a portion of gross domestic product is lower than in Europe. And this is expected to worsen if estimates that one-third of the population will be 65 or older by 2030 prove accurate.
In Japan, 20.2 percent of the population was 65 or above in 2005, giving it the highest ratio in the world, followed closely by Italy, and then Germany and France, according to the Internal Affairs and Communications Ministry.
And with more and more people choosing to remain single, families cannot be expected to lend a helping hand to the elderly as they did in the old days, experts say.
Hisashi Yamada, a senior researcher at Japan Research Institute, warns that taxpayers may not be convinced of the need to raise taxes unless the government streamlines parts of the bloated welfare system.
For example, Sweden provides inexpensive medical care, but it also has an efficient medical system, he said.
In Japan, people may go to a clinic just because they have a cold.
In Sweden, however, that's unlikely to happen because so-called gatekeepers sort prospective patients so only those who really need treatment get to see a doctor, Yamada said.
The argument for higher taxes would be more convincing if the younger generation could feel they will benefit from it, he said.
Compared with Sweden, Japan spares little for its younger generations. For example, Japan spends about 4.4 percent of its social security expenditures on family-related benefits, compared with 10.9 percent in Sweden, according to OECD statistics for 2008.
Thanks to the generous benefits for parents raising children, mothers in Sweden can continue working.
In Japan, however, about 70 percent of working mothers quit their jobs after giving birth to their first child, according to the Cabinet Office.
"It would also be a plus for the economy" if more mothers can work in Japan, Yamada said.
Fujimori of Mizuho Information urges more financial assistance be given to workers, especially since about 35 percent of them are nonregular employees not protected by corporate safety nets.
In Northern Europe, governments not only provide a safety net for the unemployed, but also "a trampoline" in the form of job training and other measures to help them jump back into the labor market, Fujimori said. "By being employed, workers can get security. In the long term, returning them to the workforce will be beneficial for the government finance."
Fujimori said younger people in Japan need to receive more benefits from social security spending, which is lower compared with other developed nations. "We need to expand the social expenditure as a whole and distribute more to younger generations," he said.
In Sweden, social welfare is more universal in that it gives equal medical or educational opportunities to all citizens. As a result, high taxation is generally accepted by the public, experts said.
"Sure it sometimes feels frustrating that so much of my salary is deducted as tax," said Ejdersten in Stockholm. "But I see it as a precondition for the welfare society we have in Sweden."