On the Sustainability of the Japanese Occupational Welfare Model: A Political Economy Perspective

After decade long economic problems, Japan is facing the crisis of financing social welfare provision, as the occupation-sponsored welfare model is highly vulnerable to be collapsed. Yet, the present problem has its historical roots with its economic miracle and welfare expansionism prior to, as well as after, the burst of the bubble economy.

In 1961, after years of lagging behind some other industrial countries in providing properly coordinated social security services, the Japanese government accomplished its goal of ensuring that every member of society had a pension plan and medical insurance with the implementation of the basic framework of a national insurance scheme of social security. Once the system was established, the government was preoccupied with the task of boosting benefits in these social security programs, and failed to pay due attention to future demographic changes.

Gifted by uninterrupted economic growth in 1970s and 1980s, the government was able to make headway in upgrading its social security system, making such improvements as increasing pension payments, ensuring that there was no village without health and welfare services and putting in place a health insurance system for elderly people.The Japanese welfare model seemed to work perfectly well as an accompaniment to the postwar economic miracle.

Yet, the occupational-based and labor-market-financed social welfare model has its limits and as changes in the global economic climate, regional crises and domestic problems set in, it reached the verge of collapse by the late 1990s. A recent statement by the Health and Welfare Ministry revealed what is perhaps the true story of the Japanese welfare model, namely that Japanese taxpayers cover a smaller portion of the bill to operate the social security system than their counterparts in the United States and Europe. Hence, social insurance is financed more by the contributory pensions and health insurance schemes than by various forms of general taxation, and contributions are made to all three tiers of the Japanese state-run pension system, which are:

1. The basic pension scheme sets the overall framework; it covers people in all categories of society—the self-employed, spouses of insured people, private-sector salaried workers and government employees.

2. Corporate employees and public servants are also insured under employees' pension and mutual aid pension schemes.

3. Employees at some private-sector corporations receive benefits from funds operated by these companies.

In the late 1990s, the premiums paid by employees for their pension schemes stood at the equivalent of 17.4 percent of private-sector salaried workers' wages, and an average of 8.6 percent for health insurance. Taken together, this 25 percent contribution means that individual corporate workers pay the equivalent of three months' wages in premiums for their pension and health insurance plans each year, although the burden is actually split 23 percent from employees and 27.5 percent from their companies.

Other macro data also suggest that some 65 percent of social security is financed by the contributory pension and health insurance schemes, and the state's monetary transfer from central and local taxes in this sector is only 25 percent, with the 10 percent balance coming from government asset investment and other income. The social insurance burden hence is higher than the taxation contribution.

The sustainability of the occupational welfare model is under great strain due to problems in Japan's corporate sector, including redundant workers and networking of the banking and manufacturing groups, and the (procrastinated) need for corporate restructuring in the near future in the face of global competition and the recent Asian economic crisis. The crisis-ridden welfare financing system is also reinforced by the ever-increasing governmental debts (beyond 150 percent of its GDP in 2001)—characterized by the down-grading of the state's credit rating by global credit rating agencies, like the Standard and Poor's in April 2002 that:

Japan's general government deficit to remain in the 8-percent range for several years. Coupled with continued weak growth prospects, Japan's fiscal stance is unsustainable. Even when the adjustment belatedly occurs, it will be too late to hold Japan's gross general government debt to GDP ratio below 200 percent without partial monetization of fiscal debt through inflation.

Domestically, many salaried workers already feel that they are too heavily taxed for their pension and health insurance premiums, as well as having income and other taxes deducted from their paychecks every month, not least is the possibility of mass scale redundancy in the last few years. The controversial consumption tax has increased from 3 percent when it was introduced in 1989 to 5 percent at present to contribute funds to welfare programs.

Taxpayers may feel even harder hit if they have to pay higher premiums to meet the sharp increase in social security costs that will result from caring for an aging society in the future. The funding of social security is therefore a political as well as economic question, and the extension of the system to more welfare had to be done in a way that would not compound the problems of the existing system. The challenge now for Japan is to carry out both economic and social reforms.

by On-kwok Lai (Kwansei Gakuin University, Japan)