At the beginning of the discussion, Professors Masaaki Honma and Naosumi Atoda gave the keynote speeches (see the complete speeches on our website). A panel discussion was then held, including questions from the general audience and an exchange of opinions.
 

1. Outline of the keynote speech"About the Reform of the Pension System"by Professor Masaaki Honma (Osaka University)

• While designing the reform of pension system, it is necessary to take into account vitality, reliability, and sustainability. I have already estimated the internal rate of return as a measure of intergenerational inequity, and pointed out to the problem of sustainability in an environment of diminishing population and sagging economic growth. There is an urgent need for the reform of the pension system. A revision of the benefits package from the standpoint of vitality, reliability, and sustainability is inevitable.
• It is also necessary to discuss the extent to which the contribution ratio is acceptable in the national economy. If the current situation is prolonged, the potential national contribution ratio will exceed 60 percent. How will this affect vitality? According to the analyses of the Economic and Financial White Papers, there is some correlation between economic growth and the contribution ratio.
• The dispute about the appropriate composition of the national contribution ratio?consisting of national taxes, local taxes, and social insurance premiums?is essential. It is also necessary to consider the combination of pension, medical care, nursing care, and employment in the insurance premiums. Furthermore, this is closely connected with the fiscal resources of the basic pension. How taxes should be allotted to the basic pension is a moot issue. Before discussing the level of pension insurance premiums, it is important to consider the optimal level on which overall insurance premiums should be set.
• It is necessary to clarify the aspects of the transitional period as soon as possible, keeping an eye on the effect exerted by the pension insurance premiums on sustainability, labor supply, savings, and business behavioral patterns.
• In connection with pension benefits, it is necessary to examine whether the generation already receiving pensions will agree to participate in the reform. For example, a decrease in rate of basic pensions of high-income people, revision of tax exemptions, and collaboration in the form of the after-tax income can be considered. Elderly generations have a high level of savings. So an adjustment solely on the flow level is difficult, since problems on the stock level still remain.
• I have some doubts on whether an imitation of the Swedish system of setting an insurance premium ceiling and weakening the connection with benefits will really work. An adjustment in the form of a built-in receipt of a pension and benefits, and usage of accumulated funds will become important factors.
• The nature of basic pension as public assistance should be revised while strengthening its role and redefining its ideals.
• What is important is not the vision limited to the problems of the pension, but a comprehensive perspective on how to incorporate insurance and taxes into the economy. Furthermore, it is usually said that taxes in the pension system are like a free lunch, but it should be kept in mind that both taxes and insurance premiums are public financial burdens.
• The uncollected 40 percent of the national pension is a serious problem. Intergenerational inequity is a main cause of moral hazard, and is a natural consequence in the case of a system with small penalties. I think the fact that pension insurance premiums collection process was transferred from the authority of local governments to the authority of the national government exerted great influence. A comprehensive collaboration among authorities in regard to the collection is indispensable.
• It is important to construct a comprehensive insurance system, including medical care and pension, to create a system incorporating penalties in the form of benefit deduction when they go unpaid. For this reason, it is necessary to develop individual accounting into social security and to provide information on the individual level.

2. Reference:"Simulation of the Pension System Reform"by Professor Naosumi Atoda (Keio University)

• I conducted a simulation on the basis of the reform plan proposed by Minister Sakaguchi of the Ministry of Health, Labor and Welfare. From the standpoint of vitality, this paper presumes an increase in the insurance premiums due to the dwindling birthrate and aging population, and examines what will occur if the ceiling on the premiums is set to 20 percent, 18 percent, and 16 percent. From the standpoint of reliability, this paper assumes a rise in the age of pension payment eligibility and cut in the pension of high-income group as a method to contain the decrease in the benefits level as much as possible. Furthermore, a simulation measuring the intergenerational gap was conducted in connection with sustainability.
• The results of the simulation show that the 16-percent ceiling imposed on the insurance premiums leads to an additional 10-percent point model pension benefits decrease as compared to the 20 percent ceiling case. In addition, a rise in the age of pension payment eligibility to age 67 makes little difference. Nevertheless, when a cut in the pension of the high-income group is assumed, the benefits level amounting to 50 percent of the wage level of working generations becomes feasible. If we conduct such a reform, the 16-percent ceiling on the insurance premiums comes into sight.
• To restrain an increase in the potential national contribution ratio, it is necessary to conduct fiscal reform in conjunction with it.
• In the intergenerational comparison, this paper also makes a trial calculation of the proportion of benefits in respect to the life-long payment of insurance premiums?including the burden of business owners?can be obtained assuming a 3 percent discount rate. As compared to the intergenerational gap existing under the ongoing system, the gap narrows, though only to a slight degree, under the hold-down of insurance premiums burden. If the age of pension payment eligibility rises, however, the gap widens. In the case of a cut in the benefits of the high-income group, the generation born after the 1970s remains more than one. However, there is no significant improvement in the intergenerational gap.

3. Panel Discussion

(Yashiro)

• The sustainability of the pension system is the most important problem. For this reason, the correction of the intergenerational gap is a crucial issue. A system causing losses to the subsequent generations is dangerous for beneficiaries. It is indispensable to reduce the intergenerational gap as much as possible.
• A rise in government contribution means an increase in the national burden in the form of taxes. It is necessary to consider the problem by taking into account both taxes and insurance premiums.
• The share of households with full-time homemakers serving as model households has decreased. When the aging of the population reaches a peak, pensions should be discussed based on the data on two-earner households from the viewpoint of neutrality to employment.
• In an environment of declining birthrate, aging population, and low economic growth, it is impossible for all generations to gain in terms of life-long benefits and liabilities. Besides, in reality there is a national burden in the form of taxes and premiums paid by companies. Information disclosure on these issues is essential.
• From the standpoint of sustainability, what is important is not intergenerational income transfer, but support of low-income elderly people by the high-income elderly. One possible method is a provision of supplementary pensions from the high-income elderly to the poor elderly people through the imposition of a comprehensive tax . Thus, it is possible to protect low-income elderly people without resorting to the intergenerational gap.
• (A question to Professor Atoda) Isn't it enough to compare the generations born after the 1950s that benefited from the high-speed economic growth period? For an intergenerational comparison, it seems unnecessary to compare to generations born in the 1930s, before the war. Decreasing the ratio of life-long benefits to life-long contributions of the baby boom generation and bringing it closer to one appears to be a realistic goal. Looking at the data on people born in 1950 in Professor Atoda's estimation, a significant difference can be seen in all the cases.

(Miyajima)

• It is usually said that insurance premiums should be discussed in conjunction with taxes. However, a clear record of who paid and how much they paid remains only in case of insurance premiums. In case of taxes, losses and gains are not clear.
• Fixed policy costs are necessary to make the entire nation enroll into the pension program. Raising the portion funded from tax revenues has an effect of expanding the assessment base to income other than wages, but it is necessary to put on the brakes.
• I attach much importance to levying taxes on pensions. It is crucial to clarify both the before-tax and after-tax levels of benefits. It is impossible to adjust the benefits level only within the pension. Taxes can be made subject to adjustments together with other kinds of income.
• Unfortunately, we have not taken up the issue of macroeconomic slide (a pension adjustment method tied to fluctuations in the labor force) proposed by the Pension Division of Social Security Council. The Pension Division proposed this plan because it was aware of the necessity to incorporate stabilizers, since the future fluctuations are uncertain. I intended to discuss it there and to send a message on the sustainability of the system.
• Internal rate of return stems from the idea of a funded system. At present, we have what is essentially a pay-as-you-go system that changes according to increases in wages. The discount rate to be used in pension financing should be discussed more thoroughly. A careful discussion on whether insurance premiums paid by business owners should be included or not is desirable, since imputation of such a burden differs case by case.
• The Japanese social insurance system is inclined to cut off high-risk groups. It is necessary to examine the possibility of overturn of the separation of such insurance groups in the medical insurance and pension insurance.
• More than half of the discussion of the Pension Division is concentrated on the treatment of women. Since in the situation of diversification of employment pattern different situations are assumed, it is difficult to make a fixed model.

(Nishizawa)

• Before disputing what the appropriate level of insurance premiums should be, it is first of all important to gather microeconomic statistics on how many business establishments abandoned employee pension plans and adopted the national pension plan and other plans.
• Even if insurance premiums are high, they are acceptable if the credibility of the government is high and propensity to savings is high. Consequently, perspective on the government's credibility and design of social insurance is as important as a dispute about the hold-down of insurance premiums.
• (To Professor Atoda) In the estimation of Professor Atoda, level of income substitution ratio becomes a meaningful figure if the pension of high-income workers is cut. It is higher than the estimation of the lowest birth rate level by the Ministry of Health, Labor and Welfare.
• In connection with social insurance and taxes, Professor Miyajima pointed out that a rise in government contributions is necessary to sustain the basic pension system. Nevertheless, it is ineffective with respect to the hollowing-out of national pensions. It is necessary to discuss seriously the financing of basic pensions from consumption tax revenues.
• The macroeconomic slide plan proposed by Pension Division is different from the Swedish system. Unlike the Swedish system, which is set in motion in during emergencies, the proposed plan is to cut benefits unilaterally and to expect effects that may appear in 25 or 30 years in the future. The estimation of the intergenerational gap by means of the wage increase ratio is not completely meaningless, but it is desirable to agree on what yield rate should be used.
• The reform of the pension system is "half conclusion and half process." The Pension Division offered both pros and cons of the issue. This indication of different ways of thinking makes it valuable. Nonetheless, I have doubts about some members and on the positioning of the division and the other divisions working on pension reform. The Council on Economic and Fiscal Policy should pursue more professional disputes. To carry out fair and exhaustive discussions, it is necessary to revise the government system itself.
• Unification of pension terms is necessary. Moreover, it is necessary to make the term "macroeconomic slide" clearly understandable.

(Atoda)

• Keeping vitality is the most important issue. In the future it will be necessary to impose a heavier burden on the nation to some extent, but the problem is whether 20-percent pension insurance premiums are endurable or not. Now the tax burden is decreasing due to cuts in taxes. In contrast, social insurance premiums, including medical care, has already exceeded 20 percent. This means that individual burden exceeds 10 percent. There is not yet a feeling that taxes are excessively heavy. Nevertheless, since the tax burden is expected to increase step-by-step after the revision of deductions and exemptions from taxable income, it is important to restrain an increase in the premiums as much as possible.
• If an increase in public insurance premiums is contained, the potential national contribution ratio is likely to settle at the low level of about 50 percent. It is necessary to consider how to cover all expenditures by 16- percent insurance premiums if possible. An ideal way is to provide social security to people who need it most by keeping premiums payments as low as possible.
• It is not fair to change the discount rate every time. If we are going to discount at wage rates, we should also have done in this way in the past.
• (To Mr. Yashiro) the generation born in the 1930s benefited from the high-speed economic growth in the 1960s as well. A revision of intergenerational inequity is impossible without an adjustment in the pensions of current pensioners.
• Simulation leaves the problem of women out of consideration. Attribute of households should be considered. It is strange that two-earner families suffer a certain loss under the current system.

(Honma)

• The problem of intergenerational inequity exerts a great impact on vitality. The problem of combination of accumulated funds, insurance premiums paid from wages and the portion contributed by tax revenues deeply concerns the issues of equity and vitality.
• (To Mr. Nishizawa) You said that high insurance premiums are acceptable if the credibility of the government is high. Nevertheless, it is necessary to keep in mind that companies decide their business behavior by taking into consideration wage costs after taxes. Consequently, the level of insurance premiums exerts influence on the decision whether to make domestic investments or to shift production overseas. At the macroeconomic level, growth due to domestic capital investment or growth due to investment income on current account will ensue.
• (To Professor Miyajima) Concerning the shift of tax burden by companies, a full shift is possible through technical substitution. In the short run, the estimation of Professor Atoda is correct. I think the reversion of corporate contribution rate levels and corporate tax rate levels is unnatural.
• (To Mr. Yashiro) An outcome in case of a reform drastically changing the initial value will differ from that of a reform ensuring continuity. It is the nation that has to decide to what extent the changes are acceptable. For this reason, it is important to provide information continuously to the people.

(Yashiro)

• (To Professor Miyajima) It is usually said that you will not receive a pension without your own efforts. However, in the overall social security system, it is possible to obtain social assistance by doing absolutely nothing. Originally, the public pension means forced savings that are received in the form of payment of insurance premiums. This is "hollowing out." It is doubtful whether it is possible to maintain the present pension collection method. To collect premiums for sure, it seems there is no other method but to collect insurance in the form of taxes.
• That does not mean a general tax. Why is it impossible to cover pension benefits from a pension-focused tax? Originally, social insurance premiums are the social security tax. In this case, consumption tax is fairer tax in the aspect of collection.
• (To Professor Honma) In case of reform of the basic pension collected by a special-purpose tax, individual insurance premiums paid up before the reform should be left and every person should pay the insurance premiums in the form of consumption tax after the reform. Under the present situation, contribution of corporate employees is used in the national pension partly in the form of contribution to the basic pension. The fact that only a small minority of specialists has known about this situation is also a problem.
• In case of collection of premiums in the form of consumption tax, it would be easier to centralize the national insurance. I do not think it is right to exclude such a choice from consideration only because it does not leave records.
• Continuity of policy means consideration of ideal goals in 10 years and working on ways to reach them. Such way is transparent. Continuity is important, but, it is possible to respond to policy changes through transitional measures.
• It said that full-time homemakers cannot pay insurance premiums. Nevertheless, they should bear the burden of premiums. Husbands should pay them as a part of marriage expenditures.
• Comprehensive discussions about taxes, insurance, annual total revenues and expenditures are important. It is difficult to conduct discussions only within the framework of pensions.

(Miyajima)

• (To Professor Atoda) First of all, was there a need to decrease the tax burden through discretionary tax cut measures? The tax burden is affected by business conditions. Examples of revision of insurance premiums level and tax burden level are seen in other countries as well. This problem is closely connected with the problem of whether the government should work within its budget, or whether special accounting should be used, or whether it should be entrusted to the private sector like in the United States. It is impossible to judge only from the data whether such a case is dangerous or not.
• (To Mr. Yashiro) It is over-optimistic to think that it will be possible to completely collect insurance premiums in the form of taxes.

(Nishizawa)

• In the pension system reform, it is necessary to divide the things that should be done immediately and an ideal social security system that should be discussed in the long term.
• What should be done immediately is to put restraints on benefits. One  possible means to accomplish this is to apply a macroeconomic slide to the current pension recipients.

(Honma)

• It is necessary to consider deliberately whether the consumption tax should be used as a special purpose for pensions. Recently, an easygoing argument trying to solve all the problems of revenue shortages by a consumption tax can be heard. It is extremely dangerous.
• According to the theory of public economics, taxes on wage income and the consumption tax are equivalent. What is more important is imposing taxes on stock.
• A dispute on the capability of tax collection and social insurance is fruitless. It is important to discuss what collection system should be created.

(Yashiro)

• It is clear that, at the very least, a dual system of tax and social insurance premium collection from the citizens is strange. Centralization is desirable. This is one of the issues on the reform administration agenda.

(Miyajima)

• In conjunction with collection of premiums, I argued that it is necessary to consolidate the collection system or to entrust it like in Great Britain. As a first step, information exchange between collection authorities is important.
• There is a definite limit on the dispute of the problem within the flow framework. It is necessary to consider the problem comprehensively, including the relationship with stock. Inheritance tax has been discussed a lot in connection with the stock problem.
• The estimation of Professor Atoda assumes two frameworks: a 16-percent  pension premium rate and a 50-percent potential national contribution rate. Thorough consideration of these frameworks is necessary.
• I doubt whether 50 percent is a critical point that will lead to a loss of vitality. In the Economy and Public Finance White Paper published this year, there is an analysis of the national contribution ratio and economic vitality. However, it is not yet proven that high insurance premiums will dampen economic vitality.

4. Discussion with Audience
(Audience)

• The dispute on the impossibility of increasing insurance premiums because of the recent economic slowdown greatly contributed to loss of confidence in the sustainability of the pension system and an increase in concerns about pensions.
• It is impossible to create reserves under the tax-funded system, which is pay-as-you-go. Won't it lead to procrastination of the discussion?

• A cut in the benefits of people already receiving pensions seems to discourage workers and to lead to a loss of vitality.
• The child-rearing burden has triggered a decline in birthrate. Is it possible to apply a pay-as-you-go system to those who raised children and create a self-funded system for those who have no children?

(Atoda)

• In case of freeze-up of insurance premiums, it is also necessary to discuss curtailment of benefits. What we should do now is to contain benefits and to avoid measures that will intentionally worsen pension financing.
• A cut in the benefits of current recipients will touch only the top several percent of high-income earners (company executives, for example) in my simulation. It is doubtful that this cut will discourage them.

(Yashiro)

• The Tax-funded system is concerned only with basic pensions. The second stage should be a funded system.
• The simpler the pension system is, the better it is. It is problematic to tie it to private issues such as number of children. Women's participation in the labor force and child rearing is the task of establishing a gender-neutral society in which both men and women can participate fully, rather than a problem of pension.

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