Sat, Oct 15, 2016 page8

• Increasing taxes to fund pensions

  • By Jason Chuang 莊正中
  • • 
    • 
    • 

  Proposed solutions for the national pension system’s financial problems have been limited to ways to reduce payments, raise premiums and increase pension fund investment returns. All along, the main focus has been on improving the fund’s investment performance.

  However, after the global financial crisis and the European sovereign debt crisis, and with Brexit looming, investment management has become increasingly difficult. Not only is it impossible to ensure a high return rate over the long term, it is also a mistaken and risky approach.

  For instance, in an attempt to increase returns, Japanese Prime Minister Shinzo Abe’s administration in 2014 doubled the percentage of the Government Pension Investment Fund invested in equities to 50 percent, causing the fund to lose more than ￥5 trillion (about US$48 billion) in the second quarter of last year and again in the second quarter of this year.

  Hoping to retrieve these losses, Japan’s Democratic Party formed a special task force to probe the political responsibility of those involved.

  In contrast, Germany’s pension system has maintained a stable premium rate of between 18 and 20 percent since 1970. The major sources of its pension fund include the federal government treasury in addition to contributions by employees and employers.

  Germany raised its consumption tax by 4 percentage points and began levying an ecological tax to provide additional revenue for the nation’s pension system. By 2011, revenue from consumption and ecological taxes covered 9 percent of the nation’s public expenditure on pension schemes, while 28 percent came from the treasury.

  The German government first raised its consumption tax by 1 percentage point to 16 percent in 1998. It then raised it again to 19 percent in 2007. Aside from covering budget deficiencies, the additional tax revenue has been used to lower social insurance premiums for unemployment insurance, pensions, healthcare and long-term care by 1.6 percentage points.

  In 2014, following Germany’s example, Japan also raised its consumption tax from 5 percent to 8 percent in the hope of helping the government pay off its pension system’s debt and address the increased expenditure on social welfare due to an aging population.

  Taiwan’s consumption tax is a mere 5 percent, which is not only lower than South Korea’s 10 percent, Japan’s 8 percent and Singapore’s 7 percent, but also significantly below that of EU countries, where premium rates are more than 20 percent. This leaves room for raising the sales tax to make up for the financial shortfall in the pension system.

  In 1999, Germany went through an ecological tax reform, which led to increases in the fuel tax and the implementation of an energy tax, incrementally raising these taxes until 2003. This tax revenue was mainly directed to the national pension fund and used to lower employer contributions for employees and, as a result, created more job opportunities.

  In 2003, ecological taxes alone generated revenue of 18.7 billion euros (US$21 billion), 90 percent of which was used to support the public pension system. As a result, the public pension premium rate was lowered from 20.3 percent in 1998 to 19.5 percent in 2005.

  The combination of an aging population and economic pressures means that without the contribution from ecological taxes, the premium rate would have been at least 21.2 percent in 1995 — 1.7 percentage points higher than what it is now, with the contribution of ecological tax revenue.

  The government should consider adopting the same model by gradually raising the sales tax and imposing an ecological tax, as a way to effectively solve the fiscal crisis in the pension system.

  Jason Chuang is an associate professor in the Department of Social Policy and Social Work at National Chi Nan University.

  Translated by Tu Yu-an
• Most Popular

  • 1

    Dell picks AMD for business PCs

  • 2

    Ministry lifts overseas limits on TSMC

  • 3

    New missiles to be deployed in north

  • 4

    Retired officers indicted over collusion

  • 5

    Buffet defies suspension order after illness reports