The balance sheet of the social security pensions in Japan currently suffers from a huge amount of excess liabilities around 600 trillion yen (which are equivalent to 1.2 times as large as the Japanese GDP of the year 2000), as far as the promises entitled by the contributions made in the past are concerned. Any hikes in the contribution rate will induce a serious incentive-compatibility problem, and there will be little room for the Japanese government to increase the contribution rate in the future.
This paper proposes to reduce pension benefits by about 13% and to increase transfers from general revenue by introducing a 2% ear-marked consumption-based tax and by strengthening taxes on pension benefits, in order to restore a healthy balance sheet.
