Changes in society and economy in recent years

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1 Changes in society and economy in recent years Since the 1960s, when the basic framework for the existing social security system was first built, up until today, there has been a significant change in the social and economic circumstances that should be the basis for the social security system. Declining birthrate and aging society Advent of the society with a declining birthrate, coupled with the rapid aging society Population aging rate Changes in the employment situation Increase in non-regular employment Number of non-regular employees million people % of all employees Total fertility rate % of all employees Excluding corporate executives Changes in the form of a family Decrease in three-generation households and increase in households of the elderly living alone Stagnant economic growth Structural stagnation due to the declining birthrate and aging society Number of households of a single person or married couple without children aged 65 or over 0.96 million households million households % of all households million people 2010 Real economic growth rate 9.1 FY1956 FY1973 average 20% of all households 0.9 FY1991 FY2010 average Sources For the population aging rate and the number of households of a single person or married couple without children aged 65 or over, Ministry of Internal Affairs and Communications, Population Census FY1970 and FY2010 ; for the total fertility rate, Ministry of Health, Labour and Welfare, FY2011 Vital Statistics annual estimate ; for the number of non-regular employees, Ministry of Internal Affairs and Communications, Labor Force Survey, Long-term Time-series Data ; and for the real economic growth rate, Cabinet Office, National Accounts for FY1998 FY1956 FY1973 average and National Accounts for FY2009 and FY2010 FY1991 FY2010 average. Relationships between pension and medical care benefits and national finance Along with the advancement in the aging society, the amount of social security benefits payable has been increasing significantly, while the amount of social insurance premiums receivable has been flat, resulting in the widening of the gap between social security-related expenditure and revenue. Not only tax revenues but also a large amount of national debts have been used to fill in this gap. If the current situation is left unaddressed, it would be difficult to maintain the existing social security system in the future. trillion yen Benefits trillion yen Nursing care, welfare and others Social insurance premiums Social security benefits 20.6 trillion yen (including 8.4 trillion yen for nursing care) Total amount of money and services provided to citizens under the social security system excluding the amount equivalent to citizens self-pay burden Medical care 35.1 trillion yen Taxes and debts Pension trillion yen FY2012 budget ; the data Sources National Institute of Population and Social Security Research, Social Security Benefits for FY2012 budget is an estimate by the Ministry of Health, Labour and Welfare. 18

2 What is the Comprehensive Reform of Social Security and Tax? Amid the dramatic changes in the social and economic circumstances, we are now facing the challenge as to how we should maintain and enhance our social security system. At the same time, we should also strive to consolidate our national finance, which is currently at the worst level among major developed countries, by securing stable financial resources for social security. Thus, the government is pushing ahead the reform with the aim of simultaneously achieving two priority goals: 1 enhancement and stabilization of social security and 2fiscal consolidation. Securing stable financial resources through the fundamental reform of consumption tax and other tax systems Simultaneous achievement Enhancement and stabilization of social security Solving the problem of children on the waiting list for nursery schools, enhancing obstetric and pediatric care, emergency medical care and home medical care, and responding to the growing demand for nursing care services + Stabilizing the existing system of social security services that have been rapidly increasing every year due to the aging society (securing stable financial resources) Achievement of fiscal consolidation Taking Japan out of the worst fiscal situation among major developed countries The Government aims to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020, thereafter the Government will seek to steadily reduce the public debt to GDP ratio. Avoiding a market crisis originating in Japan Increasing the consumption tax rate (national and local)in stages to 10% by October 2015 Social Security and Tax ID Number System In order to improve convenience for citizens and increase efficiency in administrative work, a bill for development of the Act on the Use of Numbers for Identification of Specific Individuals in Administrative Procedures (ID Number System Act)and Related Laws was passed and enacted on May 24, In FY2016 and onward, the ID number system will be put into use for tax, social security and other various fields successively. Schedule toward the introduction of the ID number system 19 For more information, please visit the following website.

3 In the comprehensive system reform currently underway, the government plans to revamp the tax system thoroughly, including increasing the consumption tax rate, with the aim of achieving both enhancement and stabilization of social security and fiscal consolidation simultaneously. An increase in tax revenue resulting from the consumption tax hike of 5% will be appropriated in full as the financial resources for social security for the benefit of all citizens. 5% consumption tax hike Increase in tax revenue to be appropriated in full as the financial resources for social security For enhancement of social security For stabilization of social security to protect the existing social security system e.g. solving the problem of children on the waiting list for nursery schools, enhancing medical and nursing care services, giving consideration to lowincome people Approx trillion yen (equivalent to about 4% of consumption tax revenue) Increase in the government s share of contributions to the national pension program to 50% (approx. 2.9 trillion yen) Increasing the government s share from 36.5% to 50% to secure the financial resources for the national pension program Approx. 2.7 trillion yen Reduction of the burden to be passed on to future generations (approx. 7 trillion yen) equivalent to about 1% of consumption tax revenue Revamping the existing social security system to respond to the increase in social security costs along with the aging society and to secure stable financial resources for social security Increase in the government social security spending following the consumption tax hike (approx. 0.8 trillion yen) Increasing social security spending in response to the increase in pension benefits and medical service fees Contributing to fiscal consolidation to a certain degree Under the annual general budget provisions, the national consumption tax revenue is currently allocated only to the three costs for the elderly basic pension, medical care, and nursing care. The ongoing comprehensive reform expands the range of purposes to which the national consumption tax revenue will be allocated to cover the four costs for social security pension, medical care, nursing care, and responding to declining birthrate and makes this policy clear by law. hike to 10% (national and local) Existing system revenue (10%) revenue (5%) Three costs for the elderly (national) Appropriated to welfare expenses National tax revenue 2.82% Local allocation tax grants 1.18% Local consumption tax revenue 1% Consumption tax revenue 4% revenue 7.8% (+3.8%) Basic pension Medical care National tax revenue 6.28% Four costs for social security (national) Appropriated to social security-related expenses Pension, medical care, nursing care, and responding to declining birthrate institutionally established Nursing care Local tax revenue 2.18% Local tax revenue Local allocation tax grants 1.52% 1.52% Local consumption tax revenue 2.2% +1.2 Allocated as financial resources for social security Excluding the current 1%-portion of the local consumption tax revenue 20

4 Increasing the consumption tax rate In consideration of the influence on the economy, the consumption tax rate will be increased in two stages. From April % (national 6.3%; local 1.7%) From October % (national 7.8%; local 2.2%) Why consumption tax? As it is a tax designed to impose a fair burden widely on consumption in general, it can avoid concentrating the tax burden on specific generations (e.g. working generations)and ensure neutrality to business activities. Its revenue is less susceptible to economic fluctuations or demographic changes. It has high fund-raising capability. A n i n c r e a s e i n t a x r e v e n u e resulting from the consumption tax hike will be used in full as financial resources for the enhancement and stabilization of social security. Consideration to low-income people Out of consideration to low-income people, the government will consider introducing a refundable tax credit,etc. or multiple tax rates along with the consumption tax hike. Until these measures are put into operation, a simplified benefit program will be implemented as a tentative or temporary measure. Refundable tax credit,etc In anticipation of the full implementation and establishment of the ID number system and along with the review of the related social security programs and the revamp of income credits, the government will consider introducing the total accumulation system or refundable tax credit comprehensively from various aspects, including the difficulty in ascertaining individuals income and assets, and the possibility of enforcement. Multiple tax rates The government will consider introducing multiple tax rates comprehensively in light of v a r i o u s i s s u e s, s u c h a s a r e d u c t i o n i n t a x r e v e n u e, l i m i t a t i o n o f t h e s c o p e o f eligible taxpayers, and increase in administrative costs on business entities. Simplified benefit program As a tentative or temporary measure to be put into operation during the period after the consumption tax hike to 8% until the introduction of a refundable tax credit,etc. or multiple tax rates, the government will implement a simplified benefit program, while taking into account the relationship with the mission to reinforce social security and after studying various issues such as the scope of eligible taxpayers, the definition of the income base, reduction in tax revenue, and possibility of solving problems in tax enforcement. Consideration to economy Upon the consumption tax hike, the government will implement comprehensive measures toward the goal of overcoming deflation and revitalizing the economy. The government will consider measures designed to achieve economic growth, such as allocating funds intensively to fields conducive to the growth strategy and disaster prevention and mitigation. Prior to the scheduled hikes of consumption tax rates, the government shall check various economic factors, consider economic and other situations comprehensively, and take necessary measures which may include suspension of scheduled rate hikes as well as responding flexibly to any violent change in the economic and fiscal conditions. 21

5 Efforts to ensure smooth and proper addition of consumption tax to prices is supposed to be added to prices of goods and services and finally borne by consumers. In order to enable business entities to add consumption tax to prices smoothly and properly, the related ministries and agencies will make joint efforts more vigorously than at the time of the first introduction of consumption tax in 1989 and the previous consumption tax hike in Outline of the Act on Special Measures for Addition of Consumption Tax to Prices The Act on Special Measures Concerning Correction of Acts That Impede the Addition of Consumption Tax to Prices to Ensure Smooth and Proper Addition of Consumption Tax to Prices (Act on Special Measures for Addition of Consumption Tax to Prices)was enacted on June 5, The major points incorporated in this new Act are as follows. 1 Special measures to correct such acts as refusing to add consumption tax to prices (prohibition of beating down of prices, inspection and guidance regarding the refusal to add consumption tax to prices) 2 Special measures to correct such indication that impedes the addition of consumption tax to prices (prohibition of posting an indication stating that consumption tax is not added to the price) 3 Special measures concerning indication of prices (the obligation to indicate the total price including consumption tax) 4 Special measures concerning concerted actions to decide how to add consumption tax to prices or how to indicate prices and consumption tax (excluding cartels organized for these purposes from the application of the Antimonopoly Act) This Act will come into effect as of October 1, 2013, and cease to be effective as of March 31, For more information about this Act, please visit the following website. Survey on the situation of addition of consumption tax to prices The Japan Fair Trade Commission, the SME Agency, etc. will conduct a documentary survey of a larger scale than those conducted at the time of the first introduction of consumption tax and the previous consumption tax hike. A large-scale documentary survey will also be conducted targeting large-scale retailers. The Japan Fair Trade Commission, the SME Agency and other ministries and agencies with jurisdiction over the respective industries will enhance their investigation and regulation network. Publicity to business entities and consumers In order to promote better understanding of the necessity to add consumption tax to prices, briefing sessions will be held for a wide range of business entities and thorough publicity will be implemented. Development of the consultation system regarding issues such as the refusal to add consumption tax to prices In addition to the consultation counters available at the related ministries and agencies, a government-wide common consultation counter (tentative name: Comprehensive Consultation Center for Addition of Consumption Tax to Prices)will be established in the Cabinet Office. Special provisions concerning the obligation to indicate the total price including consumption tax Under the Act on Special Measures for Addition of Consumption Tax to Prices, if it is necessary in order to ensure smooth and proper addition of consumption to prices upon the consumption tax hike, business entities shall be exempted from the obligation to indicate consumption tax-inclusive prices if they take such measures as to avoid misunderstanding that the price actually indicated includes consumption tax. From the perspective of consumer protection, business entities are required to make efforts to indicate consumption tax-inclusive prices as soon as possible. <Examples of the method of indicating prices> (Example1)Indicating the price of goods or services in the following manner on price cards, leaflets, posters, product catalogues, Internet websites, etc. 円 ( 税 抜 ) 円 ( 本 体 価 格 ) 円 ( 税 抜 価 格 ) 円 + 税 (Example 2)Indicating only the before-tax price (XX yen)on each price card, etc., while posting a clear indication stating that All prices indicated in this store are before-tax prices at a place easily viewable from consumers when they choose goods or services at the store. The related ministries and agencies will make joint efforts to implement these measures. For more information, please visit the following website. 22

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