WASHINGTON, Jan. 30 (UPI) -- Japan's pension problems of the last 10 years are a good indicator of what other aging countries will be facing in the near future. However, the effect in the United States will probably be less severe as it is not aging as rapidly as some other developed countries.
"Read past news stories about Japan over the past decade and you will get a glimpse of what many other countries will be facing in the coming decade," World Economic Forum contributor Sylvester Schieber told United Press International.
Schieber, who recently returned from the World Economic Forum in Davos, Switzerland, is director of research at consulting firm Watson Wyatt Worldwide, and co-author of the International Pension Readiness Report, created in partnership between Watson Wyatt and the World Economic Forum.
Even with the best solutions, he said, in some cases workers will end up shouldering a bigger burden of the taxes, or retirees will have to endure much smaller pensions.
"In some countries the demographic outlook is so grim that is the case," Schieber said.
"The Japanese government has just tabled a proposal to reduce the replacement rate in its pension system from about 58 percent of final wages to 50 percent over the next 15 years or so, and to raise the payroll tax at the same time from about 15 percent of pay to 28 percent. Once again, Japan is an example of what many societies face. The United States should not (face such a problem) because of our very favorable demographics, unless our health care system blows up on us."
Though unpopular, pension reform is necessary in countries with below-replacement-level birth rates, the report said.
In some developed countries, like Japan, Spain and Germany, as well as countries like China, some Eastern European countries and former members of the Soviet Union, low birth rates mean that the elderly and retired population could grow to be as large or larger than the working population, increasing retirement system costs and possibly pitting workers against retirees, according to the report.
In fact, Japan's old age dependency ratio is expected to rise almost 90 percent between 2000 and 2030, the report said.
Another problem is how workers who receive public pensions view pension reform. Unlike the United States, where private pensions are more prevalent, in countries like Germany and Italy workers primarily receive public pensions, similar to U.S. Social Security.
Though pension reforms are necessary to cut costs -- in Italy, pensions account for about 14 percent of gross domestic product -- the government's efforts to push ahead with reforms have been met with resistance. Also, large public pensions discourage workers from saving more money themselves, the report said.
The problem is that people in these countries are used to thinking that governments, not people, finance pension programs, Schieber said.
"The fact of the matter is that people finance these programs through taxing mechanisms. Until policymakers start telling people the truth about the cost of these programs and who has to pay for it, there will be a reluctance to adopt adequate reforms," he said.
There are two pension systems -- pay-as-you-go (referred to as pay-go) and funded. The pay-go pension system is based on a percentage of a worker's earnings, while funded pensions builds up a fund sufficient to pay future benefits.
Birth rate is one consideration when constructing a national pension system. Another is productivity. A lower birth rate and lower productivity favors funded plans, while a higher birth rate and higher productivity favors pay-go plans. While the U.S. birth rate is lower than it was years ago, it has stayed higher than many developed countries due to immigration and relatively high fertility rates. Other factors are also important. For instance, the overall trend worldwide is toward lower retirement ages even as life expectancy increases, which can increase the burden on workers.
The U.S. Social Security system was set up as and still is a pay-go system, but as amendments in 1983 increased taxes and caused a fund buildup. It stands at about $1.3 trillion so far, which will probably rise to between $3 trillion and $5 trillion, but will be liquidated when baby boomers start retiring in 10-15 years. In other words, it has the appearance of being funded, but the surplus is only temporary. The current fund equals three years of payments, while a real funded system would contain 10-15 years of payments. Schieber and co-author John Shoven go into this in their book, "The Real Deal: The History and Future of Social Security."
Long-term, a mixed "pay-go" and funded pension system would be best for the United States, Schieber said.
"If we were simply talking about a retirement savings program, a funded system would be the most economically efficient. Since we have redistribution built into our system to protect low-wage workers, a mixed system is probably optimal." Redistribution results in larger benefits for the lower-paid than they could save for themselves. This enhancement must be paid by higher-paid workers.
Schieber also disagreed with claims by some experts that the low-skilled job base is expanding, and therefore no extraordinary measures to redistribute pensions would be necessary.
"If we start to grow low-skill jobs relative to high-skill activities, it will reverse the trend of more than 200 years. I do not believe we are going to do this unless our education system collapses.
"To an extent our income tax system subsidizes lower earners relative to higher ones. Beyond that, I do not believe we will get into a major income redistribution program ... our welfare reforms adopted during the Clinton administration go in just the opposite direction," he said.
One seeming paradox presented by the report is that raising the retirement age is one way countries are considering to boost labor forces depleted by retirees, along with enticing more young adults and women into the workforce -- but yet, recently many companies have laid off older workers or encouraged them to retire early to cut costs. Schieber said these phenomenon should not be confused, as one is related to individual companies' circumstances, while raising the retirement age is a macroeconomic issue.
Even with favorable long-term demographics, the effect of the large baby-boomer population beginning to retire in the next decade will bring stresses similar to those being felt in Japan and the other countries. In order to avoid a possible Japan replay in the United States, the changes recommended by the report will need to be made soon.
