Japan Changes Pensions So They Fall If Prices or Wages Drop

(Bloomberg) -- The bonus that millions of Japanese seniors enjoyed in recent years when their pension income remained the same while consumer prices and wages fell is about to end.

In an effort to make the pension system more sustainable as the elderly population swells, parliament approved a bill on Wednesday that will see payments drop when prices and salaries decline, not just rise when they go higher.

The government expects to pay seniors 54.8 trillion yen ($476 billion) in pensions in the fiscal year through March, equivalent of more than 10 percent of the economy. With almost 40 million people receiving pensions, and the number increasing while the working age population contracts, pressure on Japan’s finances is growing.

Japan Changes Pensions So They Fall If Prices or Wages Drop

The Japanese system is divided into two main parts: a basic pension that all workers, including the self-employed, pay into, and an additional scheme into which government and company employees make extra contributions. The first pays pensioners an average of 57,000 yen a month, and the second, which is now compulsory for most workers, pays about an additional 100,000 yen.

Payments made into the system by workers currently fund 66 percent of payments going out to pensioners. The government covers about 23 percent of payments and the rest is generated from the pension funds’ investments.

The changes will come in steps and by 2021 it will be possible for the government to cut pension payments if wages or prices drop.

The rub for the government is the importance of pensioners in supporting consumer spending and domestic demand in Japan, both of which are vital for economic revitalization.