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Government and Economy

The Social Security System Should Value the Link between Generations:
Arguments over Public Pension May Disrupt Generations

Satoshi Ushimaru
Professor, Faculty of Political Science and Economics, Waseda University

The fiscal system for the public pension

Pension issues are attracting growing attention around the nation. For example, Osaka Mayor Hashimoto has mentioned a shift to a funded pension system for correcting inter-generational gaps in the pension as a plan by his Osaka Restoration Association. I also received a request to write about inter-generational gaps in the pension for this Opinion section. Since I have felt some anxiety about the recent attitude of the people in discussing how the social security system should be, I decided to accept this offer as an opportunity to express to the people what I am thinking about it.

The public pension financing system comprises the method of financing the amount paid as a public pension benefit. There are two kinds of financing method: the pay-as-you-go pension system and the funded pension system. Because this article cannot detail each of those methods due to the limited space, readers interested in them should refer to the appropriate literature. Now I will give only a simple description below. The pay-as-you-go system is an approach in which pension benefits received by a certain generation are financed by resources provided by the subsequent generations. In other words, each generation is supported by the subsequent generations. In contrast, the funded system is a scheme in which the pension benefits received by a certain generation are covered by asset management whose underlying resources were prepared by the same generation when they were still young, without depending on other generations. Both methods have pros and cons. With the pay-as-you-go system, later generations will support the public pension for the earlier generations even when risks emerge afterward, so the pension benefits can be guaranteed in line with economic changes, for example. While the pay-as-you-go system has such benefits, rapid aging of the population and a dramatically declining birth rate-both of which are prevailing in Japan today-would potentially generate an inter-generational gap related to the pension under this method, as is often pointed out. With the funded system, on the other hand, inter-generational gaps related to the pension can be avoided even in the case of the aging population and declining birth rate, because this method does not depend on other generations. Independence from other generations means limited response to risks, however, because any risks arising afterward, such as economic changes and asset management failure, would all have to be borne by the applicable generation alone. Which financing method to adopt depends upon to what extent the people want society to encourage people to support each other over generations regarding response to risks.

Inter-generational fairness

The people are required to pay social insurance premiums for the public pension and other social insurance schemes, as well as taxes, in a wide variety of forms. They also receive public pension benefits and other cash benefits as well as medical and care services. They enjoy discounted costs when receiving medical or care services, resulting in a smaller co-payment for those services. The amount excluding the co-payment portion is covered by social insurance premiums and taxes collected from the people. This is the mechanism of the social security system. Every generation shares the social insurance premiums and taxes mentioned above, while receiving benefits, cost reductions, and other rewards. There is, incidentally, a concept called generational accounting: that is, calculation of the amounts received and paid by each generation during the entire period of their lives, and comparison of the amounts received and those paid, under certain assumptions. Some include taxes as part of the paid amounts, whereas others focus on social security and only include social insurance premiums in the calculation. Studies on amounts paid and received by each generation through social security using the methodology of generational accounting suggested that the aging of the population and declining birth rate may cause considerable variation in the relationship between received and paid amounts generation by generation. That is, earlier generations receive more than they pay and later generations pay more than they receive. We will call it an inter-generational gap. Those studies also call for an institutional reform for correcting it. What do I consider about the results those studies revealed and the argument they made? An important contribution of those studies is that they found how the rapidly aging population and declining birth rate impact the relationship between the amounts paid and received by each generation. Given the potential variation in such a relationship brought about by the rapid aging of the population and the lower birth rate, I also agree about the necessity of countermeasures.

At this point, however, I cannot help contemplating what inter-generational fairness means here. I believe that the idea of inter-generational fairness is difficult as there are various matters determining its fairness. Indeed, any measures taken to correct the inter-generational gap pointed out above may lead to inter-generational fairness. We should change our point of view slightly here, however. Previous older generations have had many children who support the society. On the contrary, young and middle-aged generations today have fewer children who support the society. In some cases, such a factor might need to be taken into consideration when determining inter-generational fairness. What I mean is not that such factors must also be taken into account, but that inter-generational fairness is a very difficult concept, requiring taking into consideration a range of matters other than the aforementioned inter-generational gap caused by the change in the population composition, which must be corrected to some extent, of course. The content of inter-generational fairness is ultimately up to the people. Inter-generational fairness varies according to how the society should be- namely, to what extent people composing the society should bear other generations in mind.

Building a social security system that values the link between generations

The idea of shifting the public pension to the funded system and the necessary countermeasures mentioned earlier are understandable, insofar as they are viewed from a single perspective, i.e., the correction of the inter-generational gap. Indeed, the inter-generational gap is a significant issue that has to be addressed. It must also be noted, however, that seeking such corrective measures to extremes would ultimately create a society where the link between generations is severed and risks are imposed on each generation. When considering what the social security system should look like, we need to take into account not only this single perspective but also other matters as well. I have a certain anxiety. Today, people only seem to pay attention to the correction of the inter-generational gap, and they seek to decide the future of the public pension system as well as the social security system as a whole based solely on such a single criterion. Though the circumstances surrounding the social security system are certainly severe, the most important thing is what fundamental style we desire for our society. I would maintain that we need to build a desirable social security system toward the future in cooperation with each other, valuing the link between individuals co-existing in the same society, as well as the tie between generations.

On March 11, 2011, our country underwent the Great East Japan Earthquake Disaster and lost a great many people, which was heartrending. There are people who are still struggling with their own fate. We as citizens must do what we can for them. The spirit of support that many people have shown in the wake of the earthquake disaster is wonderful. With such spirit, the people would not desire a society that disrupts generations, but rather one that encourages citizens to give consideration to other generations. I would ask each of the people to consider what kind of society Japan should seek.

Satoshi Ushimaru
Professor, Faculty of Political Science and Economics, Waseda University

[Academic Background]
Graduated from the School of Political Science and Economics, Waseda University
Graduated from the Faculty of Economics, the University of Tokyo
Completed the required course work of the five-year doctoral program, Graduate School of Economics, the University of Tokyo
Doctor of Economics from the University of Tokyo

[Job History]
Full-time lecturer, Assistant Professor, and Professor, College of Economics, Aoyama Gakuin University Professor, Faculty of Political Science and Economics, Waseda University

[Membership of Governmental Committees]
Pension Actuarial Committee, Social Security Council; Central Social Insurance Medical Council

[Specialty]
Public Finance