Old Age Pensions 10 Percent of GDP and Rising
The top story in today’s Nihon Keizai Shimbun is new Ministry of Welfare and Labor data showing that the burden of state old age pensions has reached the equivalent of 10 percent of GDP and will rise further in the years ahead. At the same time the ratio of active workers paying into the system to retirees drawing from the system has reached 1.86 to 1. This is a system and country in crisis.
The Ministry of Welfare and Labor data are for 2009. In that year total outlays (pension payments) for the first time exceeded JPY 50 trillion, an amount over 10 percent of Japan’s nominal GDP.
The total number of retirees receiving pensions reached 37,030,000 persons, an increase of 3.1 percent from the previous fiscal year. On the other side of the ledger, the total number of persons enrolled in the system and paying premiums declined by 0.9 percent to 68,740,000. This produced a ratio of active premium payers to recipients of 1.8 to 1. This is a crisis.
And the crisis will soon get much worse. The Ministry is forecasting by 2015 a 20 percent increase in outlays, to JPY 59 trillion, when the full impact of the 7 million persons born during Japan’s 1947-49 ”baby boom” have reached 65 and can claim full pension benefits. By FY2025 the cost will rise to JPY 65 trillion.
Public pension outlays rising to over 10 percent of nominal GDP is a startling development. In 2005 the level was around 9 percent, compared with 6 percent in the U.S. and an average of 7.2 percent in all OECD countries.
The bolster the system’s finances, the government has raised the proportion of financing from tax revenue from one-third to one-half. But with large increases in outlays and a diminishing number of premium payers in prospect, and considering Japan’s overall fiscal imbalance–where expenditures are being financed more with borrowing than taxes receipts–the situation is dire.
It is said that if something is unsustainable then it will stop. In the case of Japan’s pension, the stopping will be in the year of eligibility, which is likely to be raised. But there will certainly be more.
The structure of Japan’s public pension system–like that of the U.S.–is that the actively working population pays premiums which are used to pay pensions to no longer active, retired persons. This system works when there are relatively many of the former and few of the latter. What happens when the population in the two categories approaches parity. Or, the latter grows greater. Obviously, the system collapses.
This is where Japan is heading, which is why fundamental rethinking is demanded.