Japan: Profound demographic crisis By José Piñera [Nihon Keizai Shimbun, June 1998] Could Japan learn any lessons from the Chilean experience? I think so, in the same ways as we have learned many lessons from Japan economic development and its ancient culture. Japan's state-run pension system is facing a profound demographic crisis. Japan's population is aging at a faster rate than any society in human history. As a result, by 2010, the country will have the world's oldest population. The ratio of workers to retirees will be nearly one to one, among the most extreme in  the world. Therefore, the country will soon find itself unable to pay promised pension benefits. Indeed, the present value of Japan's unfunded pension liabilities is greater than 100 percent of the nation's GDP. This gap cannot be filled through traditional methods such as increasing payroll taxes. Keeping the pension system solvent would require tax rates as high as 40 percent of total payroll according to some projections. Current law already endorses significant payroll tax increases and several other tax hikes are being considered as well, including extending the payroll tax to annual bonuses and a requirement that non-working spouses pay premiums. Raising taxes to such astronomical levels will lead to increasing generational inequity, with young workers paying higher and higher taxes in exchange for fewer and fewer benefits. Most Japanese born before 1950 will receive more in pension benefits than they paid in taxes. But, virtually all Japanese workers born after 1950 will receive a negative rate of return from their pension taxes. Indeed, a recent report by the Ministry of Health and Welfare predicts that young workers could pay as much as ¥10 million more in taxes than they will receive in benefits. Benefit cuts will have equally worrysome consequences, made all the more significant because many private pensions plans are also underfunded. Finally, it is important to recognize that Japan's current state pension system is a severe drag on the nation's economy in three ways. First, because pension benefits of salaried workers are penalized if they work beyond the mandatory retirement age of 60, older workers are being driven out of the labor force at a time where their experience can be of great value. Second, the high payroll tax rate reduces labor effort and productivity. Studies show that this is particularly true among women, many of whom have reduced the number of hours they work in order to keep their incomes below the level required to pay premiums. Lastly, the pay-as-you-go pension system misallocates Japan's capital resources. Considerable new wealth and current spending capability would be added to each Japanese household by allowing each Japanese worker to take ownership of his pension taxes and invest in his own, market-based, individual retirement account. Policy makers must seize the day. The longer they wait, the more difficult change becomes. Every year the unfunded liability expands. But there+s a great opportunity here. Transforming the state pension system from a pay-as-you-go one to an investment-based system of individual retirement accounts will deliver a massive blow against the economic drag of the welfare state that has characterized the 20th century and stifled the creative spirit of mankind for too long. And it could also mark the beginning of the long awaited renaissence of the japanese economy, as a result not of manipulating taxes and government spending, but of a free market revolution that unleashes the unlimited energy of Japan's extraordinary society.

 

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