Post-Upper House Election, Japan Confronts Its Old Age Social Welfare Crisis: Part 2

According to just released Ministry of Finance data, on June 30 Japanese central and local government long and short term debt stood at JPY 1008,628 billion (say 1008.2 trillion

HealthInsuranceCard (Photo credit: Wikipedia)

yen or USD 10.5 trillion), having risen JPY 32.4 trillion (USD 338 billion) from the same date a year earlier.  This was the first time ever government debt has topped the JYP 1000 trillion market.  It constitutes for every Japanese citizen alive on July 1 a debt of JPY 7.9 million (USD 82,000).

During the three years of center-left Japan Democratic Party (DPJ)-led government that ended last December fiscal policy operated under a self-imposed ceiling of JPY 71 trillion ($740 billion) regular budget expenditures and a cap of JPY 44 trillion ($450 billion) in new government bond issues.

Meeting yesterday to confirm goals for medium-term fiscal plan, the center-right Liberal Democratic Party (LDP)-led government, while proposing to keep new bond issuance in FY 2014 and 2015 below FY 2013's JPY 42.9 trillion ($440 billion), declined to set an upper limit on spending. Prime Minister Abe Shinzo's Cabinet is hoping that BOJ governor Kuroda's blowout two-year QE money expansion produce higher tax revenues on which they can load more spending. Still there are doubts, even within the LDP, about the wisdom of abandoning spending restraints.

The medium-term plan calls for halving the combined national-local government "regular budget" fiscal deficit from JPY 34 trillion ($350 billion) in FY 2013 to JPY 17 trillion ($175 trillion) by FY 2015, i.e., a roughly JPY 8 trillion ($82 billion) reduction in each year.

At the G20 meeting in Russia September 5-6, PM Abe will deliver a speech on Japan's medium-term fiscal plan promising to achieve the above numbers. He is saying that Japan's credibility and reputation require a Diet decision before the meeting to implement the doubling to 10% of the consumption tax.

As reported in the August 8 Nihon Keizai Shimbun, the medium-term plan contains no policies to lessen the pain of proposed measures to rationalize and cut costs in the three pillars of Japan's bankrupt old-age welfare system

It is the ballooning costs of Japan's already deficit plagued old-age welfare system–public pensions, state-funded health care, and state-funded nursing care–itself driven by Japan's demographic decline and a 1970s vintage system structure that are the cause of the country's massively unbalanced and deeply indebted state finances.

Yesterday's post reported that a committee, called the National Council on Social Security Reform, constituted a year ago to propose reforms in the welfare system, had presented its report and recommendations to PM Abe. Yesterday I summarized the reform proposals for nursing care. Today we look at the reforms for health care–the national health insurance system–and state pensions (Japan's Social Security retirement system).

Reforms to the Health Insurance System

Long recognized as a major problem in national health insurance has been the copayment cap of 10% for beneficiaries aged 70 and over when they receive treatment. The problem is both directly budgetary–driving ever larger deficits in the program, and symbolic:  it is a blatantly egregious example of "intergenerational inequity" where the young, working population, all the way up to age 70, who are required to pay 30%, are subsidizing the old.

In 2008 a consensus was reached to increase the copay of aged 70-74 beneficiaries to 20%, but successive governments, fearing electoral backlash, have not implemented the change. The revenues shortfall from not collecting the 10% copay produces an insurance program budget gap of some JPY 200 billion ($2 billion) that has required infusions of general tax revenues.

The National Council joined a government advisory committee on fiscal and economic policy in calling for implementation of the 20% copay level for 70-74 year olds. The government is likely to comply from next spring but in a phased manner (for new 70 year olds only) that will greatly blunt the budgetary benefit.

Reforms to the National Pension System

The National Council stopped short of recommending major changes to the pension system.  The Council declined to propose major reforms like using tax revenues to plug the funding gap for benefits for low income persons, an expansion long advocated by the DPJ.

Eligibility for starting benefits under the national pension plan (basic social security) is 65. Benefits from this basic system are uniform for all beneficiaries.