A New Look at the Taxation System in Regard to Retirement Benefits: Lump-Sum Allowance and Corporate Pensions

ABSTRACT

Fearing the collapse of the public pension financial system, or at least the emergence of inter-generational inequalities, many have argued for lowering the benefit amount, raising the insurance costs, or establishing a new special-purpose sales tax. Widely overlooked however is the possibility of securing the base funds for public pension through a restructuring of the current system.

The following report is a proposal to reform the inconsistent taxing system underlying retirement benefits (lump-sum retirement allowance and corporate pensions) into the to be in line with the tax system for national pensions where taxes are not levied at the time of contribution or operation but at the time of distribution. This would not only correct the distortion of the current tax system, but the amount of extra tax revenue that would result from this reform can be designated as base funds for the public pension and this would make it possible to defer raising the insurance costs or reducing the benefit amount. Furthermore, as the tax paid by an individual becomes the pension resources for that individual, the strain of inter-generational inequality will be eased.

The specifics of the proposal is as follows: In order to eliminate the taxes levied at the time of contribution, the income deduction for the qualified pension and the individual pension can be changed from a life insurance income deduction to a social security income deduction. In order to eliminate the taxes levied at the time of operation, the special corporation tax can be repealed. Finally, in order to implement the levying of taxes upon distribution, I propose eliminating or reducing the public pension deduction and the retirement income deduction, which are both preferential tax treatments.

If both the public pension deduction and the retirement income deduction were eliminated, the resulting surplus has been estimated to be about 1.46 trillion yen. If the government contribution to the pension fund is raised from 1/3 where it is today to 1/2 (in order to support the finances of the pension fund), this surplus would cover 66% of the 2.2 trillion yen rise that the Ministry of Health, Labour and Welfare estimates for fiscal year 1999. Furthermore, it would cover 40% of the 3.7 trillion yen rise in public contribution that is estimated for fiscal year 2025. In terms of sales tax (general tax), using the figures for fiscal year 2001, 2.2 trillion yen in fiscal year 1999 would be equivalent to a 1.075% rise in the sales tax, and 3.7 trillion yen in fiscal year 2025 would be equivalent to a 1.808% rise in sales tax.

The loss in tax revenue that would result from changing the income deduction for the qualified pension from a life insurance to a social insurance income deduction is estimated to be 0.42 trillion yen. Subtracting this from the initial tax revenue surplus of 1.46 trillion yen, the resulting total tax revenue surplus is 1.04 trillion yen. If the government liability for public pension funds were to rise from 1/3 to 1/2, the estimated surplus would cover 47% of the 2.2 trillion yen rise in fiscal year 1999 and 28% of the 3.7 trillion yen rise estimated for fiscal year 2005.

In view of these possibilities, it is strongly recommended that the current tax system be reviewed for the purpose of securing the base funds required by the public pension system.