In 1996, when the national health program reached the point where collapse was imminent, the Ministry of Health and Welfare began raising contributions and lowering benefits. Holders of employee health-insurance plans now pay 20 percent of their medical costs (versus 10 percent before), and health premiums have risen from 8.2 to 8.6 percent. In addition, the ministry is levying a ¥15 surcharge on each daily dosage of medicine, which translates into approximately a 30 percent tax on medicine.
Even this isn't enough to save the system. In raising premiums by a few tenths of a percentile, the Ministry of Health and Welfare has taken its first baby step. As one popular daily newspaper has observed, these measures amount to no more than «throwing water on a red-hot stone.» During the coming decades, the share of the health bill that a salaried worker will have to bear is projected to rise to 2.5 times the present level. Even so, to fund the health costs forecast for the next decades, premiums will have to increase three times, to about 24 percent of salary by the year 2025.
An aging population is nobody's fault. If anything, it is the result of one of Japan's great modern successes – the lowering of the birthrate. In less extreme forms, an aging population is a fate that lies in store for all industrialized nations. Japan's real problem is its failure to plan for this inevitable fate. With a high GNP and a household savings rate of 13 to 14 percent (two and a half times the American rate), Japan has the wherewithal to amass pools of capital with which to support its aging population. Or so everyone believed.
Nothing comes for free – everything has its price, as the collapse of the Japanese insurance industry illustrates. Japanese households have turned to life insurance as a way of avoiding steep inheritance taxes, among the highest in the world. Indeed, the tax system essentially forces people to buy life insurance, which accounts for about 20 percent of household savings. And, as we have seen, MOF requires insurance companies to buy low-interest government bonds and invest in the stock market whenever the exchange begins to drop. After years of investing in stocks and bonds that produce no yield, insurance companies are showing zero, or even negative, returns.
Even this would not be so serious – just a case of running in place – but, in addition, life insurers are exposed to trillions of yen of bad loans extended during the Bubble. In the latter part of the 1990s, the eight biggest insurers wrote off trillions of yen in bad loans, but this is only a fraction of the real exposure, since tobashi techniques obscure most of the bad debt. The Ministry of Finance did its best to hide the damage (no insurance company had gone bankrupt since the war), but in April 1997, MOF could no longer cover for Nissan Mutual Life Insurance, which went belly-up with losses of ¥252 billion. Others followed. By October 2000, Chiyoda Mutual Life Insurance and Kyoei Life Insurance, Japan's eleventh and twelfth largest life insurers, had both collapsed, with combined liabilities of a whopping ¥7.4 trillion, in Japan's biggest corporate bankruptcies ever, with further bankruptcies and consolidations in sight. Reliable information about pension funds and insurance is sparse-so far, only a vague silhouette of the Godzillas looming over Japan in the coming twenty-five years is visible in the mist. At Nissan Mutual Life, for example, MOF knew that Nissan was bankrupt in 1995 but allowed the company to continue in business without publishing any report of its losses for two more years.
Extremely low interest rates have also heavily affected the nation's pension funds. In 1991, pension funds in the United States made a whopping 28 percent return on their investments; Japanese pension funds gained only 1 percent. By 1998, Japanese pension funds had made the lowest returns of pension funds worldwide, declining at a rate of minus 3.2 percent, while U.S. funds garnered 14.6 percent. The year before, the rate for the United States was a hefty 18 percent. Rates of return like these, compounded annually on immense pools of money, make a difference of literally trillions of dollars to public savings.
When Japan founded its national pension-fund system in 1952, planners set 6 percent as the minimum annual rate of return for employee savings plans. Pensions have not met this goal since 1991. One survey, in September 1996, showed that only 4 percent of corporate pension funds had sufficient reserves to make payments to pensioners, and since then the situation has deteriorated further. Dozens of pension funds are outright bankrupt, with assets worth less than the cumulative money paid in by participating workers. The number of pension funds in arrears has become such an embarrassment that the Labor Ministry lowered the minimum rate of return to 3 percent in 1995, and then to only 1 percent in 1997. Meanwhile, since 1998 a record number of companies have resigned from the national pension system – more than 800,000 companies simply don't pay premiums for their employees, even though they are legally required to do so.
As in the case of health insurance, the pension system cannot survive without lowering benefits and raising taxes. Pension premiums are rising rapidly, growing from 14.5 percent of salary in 1994 to 17.4 percent in 1997, and reports say they may even reach 30 percent by 2020. In addition, in 1994 the government raised the minimum age for beneficiaries from sixty to sixty-five. As many Japanese firms and government agencies mandate retirement at age fifty-five, this leaves workers with a ten-year gap after retirement before they can receive their pensions.
Private industry faces an exposure to unfunded pensions that could develop into one huge flat tire for Japan's manufacturing businesses; for some companies, the cost of funding pension shortfalls is approaching half of their net profits. According to a survey carried out at the end of 1999, 70 percent of Japanese companies did not have enough money set aside to cover their pension obligations. In fiscal 2000, MOF changed its accounting rules to better reflect pension liabilities (previously completely unreported), but the new rules left plenty of «cosmetic accounting» techniques in place to veil the true extent of the danger. Only a handful of large companies have divulged their pension shortfalls, but the numbers for the few that have are sobering: in spring 2000, Mitsubishi Electric announced that it owed ¥540 billion; Honda Motors and Toyota Motors were short ¥510 billion and ¥600 billion, respectively; Sony needed to make up ¥225 billion. While nobody knows the true number, the aggregate shortfall for companies on a national basis is estimated to reach tens or even hundreds of trillions of yen. Given corporate unwillingness to admit embarrassing facts and the worsening economic situation in the late 1990s, the true situation is probably much worse. To get a sense of scale, the World Monetary Fund estimated Japan's pension liabilities in 1997 at roughly 100 percent of GNR As Jane Austen said, «An annuity is a very serious business.» Life will not be easy for Japan's future pensioners.
A favorite mantra of economics experts is to say that Japan's debt is of less concern than that of other countries because it owes this debt mostly to its own people. While this is true, the fact remains that the Japanese people must repay the debt through taxes, and the burden will be crushing. By 2005, according to Gavan McCormack, government debt will run about «¥1,400 trillion, ¥11 million per head (say, two years' salary for an average worker). To repay such a sum with interest would call for a tax of ¥1.7 million per year every year for sixty years from every working citizen.»
As McCormack points out, Japan can dispose of its debt in three possible ways: increase GNP (rapidly), tax, or inflate. An explosive growth in GNP is unlikely. So the next alternative is taxes, and over the next twenty-five years taxes could skyrocket to the point where they surpass notorious situations such as Sweden's. Withholdings that in 1997 took a bite of about 36 percent out of the average taxpayer's income are estimated to soar to more than 63 percent by the year 2020 – and these tax increases do not take into account the burgeoning national debt.