On the occasion of the introduction of the basic pension identification number, the Social Insurance Agency identified some 250 million numbers out of 300 million and consolidated them into 100 million basic pension identification numbers. As a consequence, 50 million pension numbers still remain to be identified. This problem has been created and magnified in various stages of pension system transitions. The chief problem is a weak governance structure. In particular, the current structure ignores the role of the  participants in the system. The best mechanism for correcting this error would be to use a feedback system among the pension administrators, pension contributors, and recipients of the pension. In addition, the internet and e-mail rather than the postal service and pensions books could be used for communication and record-keeping. In terms of pension governance, a rigorous division and clear assignment of responsibilities to each of the participating individuals, the Social Insurance Agency, and the Ministry of Health, Labor and Welfare is urgently needed.

An equally large problem created by the age demographic of the Japanese population is revealed in considerations of how the National Basic Pension should be financed going forward. To clarify, I provide a rough estimate of the change in the burden each generation would face in the case of a switch to full tax financing. We make the following assumptions:

(1) Full tax financing starts in 2007.

(2) The benefit level of the Basic Pension remains as before, that is, around 66,000 yen per month for those who made full contributions for 40 years and are aged 65 or over.

(3) Contributions to the Basic Pension are replaced by a pension-ear-marked increase in the consumption tax. This portion of the consumption tax rate is 4.2837 per cent as of 2007.

(4) Contributions to the Basic Pension of 14,100 yen per month for category 1 people are abolished.

(5) The pension contribution rate for the employee’s pension (Kousei Nenkin Hoken) was 14.996 per cent in 2007. Employees’ contribution is reduced by 5 percentage points, and is financed by the newly created ear-marked consumption tax. Companies’ contribution rate remains as before, that is, about 7.5 per cent.

Let us consider what the life time effect of a shift to tax financing of the National Basic Pension would be. We assume that this shift occurs once in 2007 and that this financing remains afterwards.

A typical life is assumed to be as follows:

(1) A man starts working at age 20 and keeps working until age 65.

(2) He gets married at age 30 to a woman aged 26.

(3) They remain married until the husband’s death at age 80.

(4) They receive the public pension after retirement.

(5) After the husband’s death, the wife receives the public pension until her death at age 85.

With these assumptions, we can estimate that the net burden would vary across different cohorts, but we demonstrate that the net burden can be smoothed across different cohorts compared with the existing plan of pension contribution increases.

We conclude that the ageing crisis is exacerbated by poor administration of the pension system. The first priority should be to establish an incentive compatible and flexible system of administering the public pension. Then we can design a long-run sustainable and transparent public pension system, accompanied by a sound finance mechanism. A great deal of empirical evidence has been given to support alternative pension reform plans. Now the Democratic Party of Japan must make some clear and robust decisions on the design, funding and administration of Japan’s public pension system.

Yukinobu Kitamura is professor at the Institute of Economic Research, Hitotsubashi University, Tokyo, Japan.