JAPAN: How To Fund An Ageing Society

BBC's Philippa Fogarty looks at how Japan plans to pay for its ageing society.

TOKYO, Japan (BBC NEWS), November 22, 2007:

Every weekend, Mr Momonoki and his wife try to make the walk to Tokyo's Asakusa Kannon shrine. The couple, who have been married for more than 60 years, are calm about the future.

"I'm not very well and I have to see the doctor quite often, but the state pays for everything," said Mr Momonoki, 86. "While I am around, the state will take care of us." But the problems will hit the next generation. "It is certainly a worry for younger people," he said.

Mr & Mrs Momonoki say they trust government to look after them

Yes indeed. In the next few decades, Japan's ratio of workers to retirees will change dramatically.

In 1990, there were almost six people of working age for each retiree. By 2025, that number will be almost down to two.

That means there will be fewer people paying tax and more people supported by the state. Government revenue will fall, while pension and health care costs will climb.

How Japan meets these costs is a serious issue. Some fear a collapse of the social security safety net could be imminent.

Tax hike

The government has already taken several steps to address the problem. Recent administrations have worked to slash spending. Public works projects have been cut, the bureaucracy is being trimmed and funding to the countryside is down.

The pension system has also been targeted. Under Junichiro Koizumi, unpopular reforms were enacted in 2004 that increased premiums and lowered benefits.

Life is getting more expensive for Japan's elderly residents

In the health sector, a new compulsory insurance system has been set up to meet growing demand amongst the elderly for long-term residential care. The proportion of medical costs borne by patients - both young and old - has also been increased.

But no-one is under the impression that this is enough.

In October a government estimate warned that, even incorporating the reforms to date, social security payouts will soar from the current JPY90 trillion ($820bn, £396bn) to JPY141 trillion in 2025.
_____________________________________________________________________

"Everyone I know is worried about the future... the government takes money every month but people worry that there will be no return" --- Young Tokyo businessman
_____________________________________________________________________

One possible answer is the consumption tax, Japan's equivalent of value-added tax. This is currently set at 5%, low compared to most Western countries. Previous administrations have avoided touching the tax because it would be an unpopular move, but rumblings from the government of Yasuo Fukuda now indicate that a jump into double figures could be imminent.

One Tokyo retiree welcomed this idea. "If the government specified that the money would go to cover pension and health costs, then I would be happy with raising the consumption tax," she said.

'Better to work'

Another option is to try to persuade people to work for longer, delaying pension payouts and using older workers to bolster the labour force. The government is gradually raising the age at which pensions are paid - by 2030, everyone will have to wait until 65 - and there appears to be no shortage of eager older workers.

According to a government survey, a substantial majority of Japanese men believe that the retirement age should be 65 or higher. In 2005, 30% of people over the age of 60 were working, a separate survey showed.

In central Tokyo, 68-year-old Mr Yamada works in a car park. "It's better to work," he says. "As long as I have my health, I'll continue to work - it's more interesting."

But Professor Yasushi Iwamoto of Tokyo University believes the government is too optimistic about swelling the labour force from the ranks of the elderly. Older people can find employment in low-paid jobs, he said, but getting many companies to keep salaried workers on will be difficult because in Japan pay is often linked to age. "The salary of senior workers is very high compared with their productivity, so basically the companies don't want to continue to hire them," he said.

Under new legislation, firms must either raise retirement ages or create re-employment programmes allowing workers to remain on lower wages - and most appear to be going for option two. Prof Iwamoto says that there is no single answer to the funding problem. "The best possible way is a combination of approaches - increasing the birth rate, trying to make the health care sector more efficient.

"One important thing is to move quickly. We expect a gradual increase in social security costs, so if we raise tax burdens right now, we will succeed in keeping the future burden ratio relatively low. If we delay, the problem will get worse."

Worried

Across Japan, people are worried about how the funding issue will affect them.

In Upper House polls in July, older voters punished the government for benefit cuts, higher health care costs and a debacle involving missing pension records.

The ruling party lost control of the chamber for the first time in 50 years - leaving no-one in any doubt about where voters' priorities lay.

An increasing number of younger workers, meanwhile, are failing to pay into the pension system because of doubts over its sustainability.

"Everyone I know is concerned about the future, about pensions, taxes and health costs," said one young businessman in Tokyo. "The government takes money every month, but people worry that there will be no return."

And this sense of financial insecurity among young people is yet another problem in itself - because it is part of the reason that many couples are choosing not to have the children that Japan so desperately needs.

© BBC MMVII