Japan struggles to pay pensions

By Alan Wheatley

TOKYO (Reuters): Controversial reforms passed by parliament on Tuesday will help shore up the finances of Japan's pension system but merely postpone tough public-policy choices dictated by a rapidly aging society, experts say.

The daunting challenges posed by the retirement of the postwar Baby Boom generation is preoccupying policy-makers in industrialized countries around the world.

Federal Reserve Chairman Alan Greenspan warned Congress on Monday that a sharp increase in the proportion of pensioners made America's public pensions and health insurance scheme for the elderly unsustainable in the long run.

In France, Prime Minister Lionel Jospin last week backed away from a showdown with public-sector unions over badly needed pension reform.

The sensitivity of pensions is clear from a glance at financial projections compiled in 1996 by the Organization for Economic Cooperation and Development (OECD).

These showed net financial liabilities of public pension and health schemes rising by 2030 to 95 percent of gross domestic product (GDP) in the United States from 51 percent in 1995; to 165 percent from 35 percent in France, and to 216 percent from 44 percent in Germany.

But the sharpest projected deterioration was in Japan, whose projected bill soared to 317 percent of GDP from just 11 percent.

"These numbers ... give politicians and central bankers heart attacks," Richard Disney of Britain's Nottingham University wrote in a recent paper analyzing the OECD figures.

The OECD is in the process of updating its study to reflect reforms undertaken by the group's 29 member governments.

With actuarial projections, even small changes to assumptions of economic growth, retirement age, earnings and other variables can result in huge revisions to pension forecasts.

But Peter Hicks, who is working on the new OECD study, said one crucial driving force will not change much -- the remorseless aging trend that will leave Japan in 2050 with just 1.5 people of working age to support every retiree. The figure now is four.

"The underlying demographic pressures have been less in Japan than in other OECD countries, but they've been mounting more steadily and they're going to continue to mount for another 20 years," Hicks said.

It was to respond to these pressures that the government rammed through the new law, which cuts salary-related benefits for new retirees by five percent and will gradually raise the pensionable age to 65 starting in 2013.

These and other measures aim to cut the annual pensions bill by 20 percent a year by 2025 and will put the system's long-term finances on a viable footing, government officials say.

Independent experts agree -- up to a point.

As a result of the reforms, the pension fund will not go into the red until 2030, according to Noryoshi Oguchi of Senshu University in Kawasaki.

"So in that sense they can maintain the present system, but if the demographic and economic projections are not right, it might well be that the pensions system gets into financial trouble again," Oguchi told Reuters.

Moreover, he said, the reforms fail to tackle gross unfairness stemming from the fact that, as in any pay-as-you-go pensions system, today's workers pay for today's pensioners.

In Japan, with a rapidly graying population, this means that the lifetime pension benefit of someone born in 2000 is projected to be US$300,000 less than they will contribute in their working life. This, Oguchi says, will put a heavy burden on working households.

With Japan's public debt approaching 130 percent of GDP, the largest in the industrialized world, the question marks over its pension finances are of more than merely academic interest.

As part of the latest changes, the government has agreed to increase its share of the financing of the basic state pension to half, from one-third now, in 2004.

It has yet to say where it will get the money from, but Kunji Okue, an economist at Dresdner Kleinwort Benson, says the result is likely to be an increase in government bond issuance.

"Put differently, steady deterioration in pension finances puts upward pressure on long-term interest rates," he said in a research note.

One thing experts agree on is that further reforms will be necessary, and not just in Japan, before governments can be sure they have their pension finances under control.

"We expect that governments will ultimately be unable to keep their pension and senior health care commitments embedded in current law because their funding raises serious solvency issues," Vincent Truglia, managing director of Moody's Investors Service's sovereign risk unit, said in a recent report.