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Debates Heat Up as Society Ages

April 2, 1998

Four working adults are now necessary to provide for each recipient of a public pension in Japan. As a result of the declining birthrate and aging of the population, this ratio is going to fall to just two working adults per pensioner over the next 30 years. The Ministry of Health and Welfare recently announced five options for the revision of benefits and burdens, with a view to revising the pension system in 1999.

Growing Burden on Active Workers
Japan's public pension system comprises the employees' pension for employees in private companies, the mutual aid pension for public-sector workers, and the national pension for the self-employed and others. In all cases, these pensions are paid not from the accumulated savings of the pensioners themselves but from premiums paid by active workers. In other words, it is a system of intergenerational dependence, by which younger generations pay insurance premiums to support the elderly generation. The upcoming reform involves mainly the employees' pension, which will be revised every five years.

In 1973 the monthly payment of the employees' pension benefit was raised from 45% of the average monthly wage of a salaried worker to 60%, and then to 64% in 1976 and the to present level of 68% in 1980. The total annual amount represents 62% of total income, inclusive of bonuses. In the typical case of a salaried worker who has paid contributions for 40 years and whose wife is a full-time homemaker, the monthly pension is about 230,000 yen (1,770 U.S. dollars at 130 yen to the dollar).

The number of active workers supporting each recipient of an employees' pension benefits has dropped, however, from 22.6 in FY 1975 (April 1975 to March 1976) to 12.3 in FY 1980 and just 4.8 in FY 1995. Because the intergenerational balance has collapsed in this way, the insurance premium has crept up from 7.6% of monthly income in 1973 (divided equally between employer and employee) to 9.1% in 1976, 10.6% in 1980, 12.4% in 1985, 14.5% in 1989, and 17.35% in 1994. In other words, the burden has increased 2.3 times over the last two decades.

What is more, the situation surrounding the employees' pension is likely to become even more severe from now on. The number of active workers supporting each pensioner is forecast to decline rapidly from 4 in 2000 to just 2.3 in 2025. The Health and Welfare Ministry estimates that without revisions to the current system, the pension premium in 2025 is going to amount to 34.3% of monthly income.

Five Options for a Benefit-Burden Balance
At the time of the last revision in 1994, it was said that the insurance premium for the employees' pension would be kept down to 29.8% of monthly income even at the peak in 2025. In discussions so far in the National Pension Council, an advisory body to the Minister of Health and Welfare, there is a strong opinion that 30% should be the uppermost limit. Therefore, in order to obtain an understanding of public opinion on the matter of the benefit-burden balance, the Health and Welfare Ministry at the end of 1997 publicly announced five options that it had proposed to the council.

The five options are: (1) to raise the insurance premium without revising the current level of benefits; (2) to keep the insurance premium within 30% of the monthly wage and reduce benefits by 10% from the present level so that they are lowered to 55% of the current average annual income of a salaried worker; (3) to hold the insurance premium to 26% and reduce benefits by 20% to 50% of the current average annual income; (4) keep the insurance premium at 20%, close to the present level, and reduce benefits by 40% to 37% of the average annual income; and (5) to abolish the salary-pegged part of the employees' pension, which means that the pension amount changes according to the insurance premium paid in active years, and to establish a uniform old-age basic pension system.

According to the Health and Welfare Ministry, in Britain, France, and Germany, the pension insurance premium is set at 20% or less of the annual income (equivalent to about 26% of the monthly income in Japan), and the level of benefits is adjusted accordingly. In view of the increasing burden on the working population, it seems that Japan may be obliged to reduce benefits to a certain extent. However, if the level is lowered to such an extent that elderly households have trouble making ends meet, then there is simply going to be an increase in other public welfare expenses, such as livelihood assistance and old-age welfare. The debate about pension benefits and burdens, such as the acceptable level of insurance premiums to be paid by workers, is going to become more urgent from now on.

Meanwhile, the suggestion for abolishing the salary-pegged part of the employees' pension is similar to the proposal by business circles for the privatization of employees' pensions, according to which each company would establish a corporate pension equivalent to that proportion at its own discretion. There are two problems here, however. First, although large corporations would be able to provide generous corporate pensions, many small enterprises would not have the leeway to do so. Consequently, many salaried workers would have to rely solely on a basic pension of about 65,000 yen (500 dollars) a month (for someone who has paid premiums for 40 years).

Second, if employees' pensions were privatized, it would be necessary for the newly established corporate pensions to take over from the public pension the salary-pegged contributions already made by individual subscribers. The public pension fund, however, would not be able to afford this. According to estimates by the Health and Welfare Ministry, there would be a shortfall of 350 trillion yen (2.7 trillion dollars), making the privatization of employees' pensions quite difficult.

Later Pension Payments, Limits on Benefits to High-Income Earners

Besides the benefit-burden balance, the debate about revision of the pension system also involves other issues. One of them is raising the age at which people can begin to receive pensions. At present, the full employees' pension is paid from the age of 60. Under the 1994 revision, however, the age of eligibility for a full pension will rise every three years for male workers from FY 2001, reaching 65 in FY 2013.

Discussions in the National Pension Council and elsewhere have focused on proposals to speed up the tempo so that the 65-year age limit can be brought forward and also to push the age limit back beyond 65. Of these proposals, the suggestion to speed up the age-limit schedule seems most likely to be studied closely with a view to implementation. The plan is to raise the age of eligibility for a full employees' pension every two years instead of every three years, and to bring forward the 65-year date from FY 2013 to FY 2009.

Another proposal is to revise the current system by which elderly people can receive a pension regardless of the amount of their income, placing restrictions on the payment of pensions to people with more than a certain income. This proposal came to the surface in the ruling party's discussions on fiscal reform. Some observers have criticized this proposal, however, saying that it would be wrong for people to be denied a pension just because they are reaping the fruits of hard work.

There is already a system by which pensions are reduced for people between the age of 60 and 64 who work in companies and receive an income above a certain amount, and it is likely that extension of the age to 69 under this system might be discussed. The Health and Welfare Ministry estimates that if this extension were realized, it would have the effect of lowering the final insurance rate by one percentage point in the future.

The Health and Welfare Ministry's plan is to wait for a report from the National Pension Council, scheduled to be issued in the fall of 1998. The ministry will then conduct a public opinion survey and other research, compile a final draft on revision, and submit related bills to the ordinary session of the Diet to be convened in January 1999.

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Trends in Japan Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.
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