Japan sales tax to 10%, in stages—it’s about time!

From the Asahi Shimbun’s Asia and Japan Watch (AJW).

No one should be surprised about this. For one, Japan does not quite have the social security system that people in other countries think it has. To the outside, it looks like the country is running either a basic pension (like Canada) or a basic pension within a larger pension system (like the U.S.).

In fact, they’ve got a convoluted system where the payments are darn near voluntary. It’s missing “generational equity”, and it’s missing comprehensive income support for the aged. We agreed to share our social security, under the totalization agreement I’ve written so much about. That’s been the rule since October 2005. I am trying to get people in Washington interested in the idea that we (the Americans) are being cheated under the current arrangement. I think it’s “take a number and wait”, though. There are the other pressing issues, like the child abductions.

You know, I follow the political scene, both here and there. But as time goes on, I get less interested in really talking about it. Because it ends up as the same bullsh*t. But here we go:

When you work, you are paying 6.2% into an OASDI (Old Age, Survivors, and Disability Insurance fund). I think it’s 5.3% for OAS and 0.9% for DI—but don’t hold me to that. Your employer pays the same fractions. It cuts off this year at $110,100.

So you see, in America, there is 5.3 times 2 = 10.6% of people’s wages going to support old age pension payments. Japan has nothing like that. The basic pension is a coupon payment book system, that many people evade. Companies can cover people under Employer Social Insurance, but that turns out to be something negotiated and not always followed. No penalties for noncompliance, either.

If Japan raises the sales tax (value added tax or consumption tax), then, in one full swoop, they could eliminate this problem of nonpayment into the pension system. You simply collect basic pension (that $700 a month or so) out of sales tax money.

There is generational equity in this. The younger people of Japan have less assets. They have less disposable income. The older people, especially those collecting pensions, have more. In some cases, a lot more. So a sales tax forces a slight pension cut on those who have the means to pay. The young people pay a 10% consumption tax throughout their entire working lives, if the plan goes forward, and hopefully don’t have to pay the separate coupon system. The money lost in coupon payments is made up by the first group.

The lack of an adequate old age pension system has been a nagging issue in Japan for many years. It ends up as one where people in their middle ages have to worry, and the old people without money suffer in silence. It’s not a good situation, and it’s good to see Japan taking the plodding steps to improve it.

[Update 1/12/12: I’m not losing anybody to say that social security is simply an income-transfer scheme, right? Does that make sense to you? The money of people putting in is used to pay for the people collecting. It’s NOT a Ponzi scheme, as Texas Governor Rick Perry had said. It’s an income transfer program, because the benefits promised fairly equally match the resources being contributed.

There is the matter, in America, of the social security surplus. People seem to think that all the money of social security has to come out of this surplus. No no. From the 1930’s until about 1982, there was never any surplus, or a very small one at best. All the money raised in a given year was paid out to the people collecting. The contributors, in turn, got to receive from the next generation paying in. It’s designed to do this.

Where surplus or “threats of insolvency” come into play is when there are more people in an age cohort, compared to other ages. In America, there are more baby boomers (born 1946-1964) than the immediate generation which came afterward. So, for generational equity, the tax rate had to be raised on social security. Otherwise, the later generation would have been paying even higher taxes in the 2010’s, 2020’s, 2030’s, etc., to support the baby boomers.

The social security surplus, which is in US bonds, allows the taxes to be shifted to the general income tax (which wealthier people are supposed to pay at a higher rate.)

People say: let’s scrap this system and let people invest it in the stock market. The problem is, though, you face the same problems. As baby boomers invest, the stock prices are bid up. Then, when they go to retire and sell, there is downward pressure on prices–and maybe even a panic crash. It won’t work.

There was wisdom in establishing a program where the government simply transfers income from worker to retiree, backed by the promise to worker that they will be insured when they, too, retire.]