A3 The Pension System

A3.1 Japan's Public Pension System

Japan’s public pension system is based on work status and age. There is a basic pension program covering essentially everyone, and an additional program for employees. The programs have survivor and disability benefits. Figure 7.A1 provides overviews. Each system has its own contribution and benefit structure, but both operate primarily as pay-as-you-go systems. Strictly speaking, the systems are not “pure” pay-as-you-go: the public pension system has reserves to pay future benefits to members of the postwar baby-boom generation.

The National Pension (NP: kokumin nenkin)—the basic national pension—is flat rate, which means that the monthly contribution is (generally) the same for all participants. The exceptions are adjustments for those with a low income and the

A1 Structure of the pension system (Notes

Fig. 7.A1 Structure of the pension system (Notes: White areas are public pensions. Shaded areas are corporate pensions with preferential tax treatment. Cross-stripe areas are additional pensions with preferential tax treatment available to individuals. Personal pension plans provided by private insurance companies are not included.) disabled. Also, non-working students can postpone contributing. It is mandatory for all citizens to enroll in the basic national pension from age 20. Category II (employee) schemes, including Employees’ Pension Insurance (EPI: kosei nenkin hoken), are earnings-related. In 2016, the Mutual Aid Pension of civil servants was integrated into the EPI.

Benefits under the NP begin at age 65. In order to receive any benefit, a person must have been in the system for at least 25 years. Someone who has been in the system for 40 years qualifies for full benefit. Those in the system for shorter periods, as well as those who postponed payments (contributions) or paid reduced rates, receive less than the full benefit.

EPI benefits are based on career-average monthly earnings, calculated over the employee’s entire period of coverage, adjusted by a wage-index factor, and converted to a current-earnings level. This replaced 60 % of the average monthly earnings of previously active male workers. The percentage is called the replacement rate.

In addition to the public pension schemes, there are corporate pension plans. These are available to many Category II insured people. For example, there are Employees’ Pension Funds with the private pension characteristic of accumulation, which provides a way to ensure better benefits for employees.

With a defined-contribution pension, the contributions are clearly specified for each employee and benefits are determined based on the sum of the contributions and investment income. Defined-benefit corporate pensions have not been adopted by many small and medium companies or self- employed persons.

The transfer of pension assets when changing jobs has not been assured, which has complicated measures in response to movements in labor demand. In order to cope with these problems, a Guaranteed Contribution-Based Pension rule was introduced in October 2001.

For the self-employed, farmers, and other Category I insured people, there is a National Pension Fund, which is a second-tier pension in Fig. 7.A1. The plan is voluntary. A participant pays an additional amount each month and, on retirement, receives a benefit in addition to her or his basic pension. The added benefit is a function of how many months a person paid into the fund.

The levels of public pension benefits are indexed to the Consumer Price Index in order to maintain the benefits’ real values. In addition, the amounts are adjusted at least once every 5 years to reflect changes in actuarial factors.

The current arrangement is considered to have an unstable financial base. The system cannot ensure long-term stability because of its inability to cope with the changing employment and industry structures in an aging society. In addition, there are inequalities in benefits and the burden among and within the three categories of those who are insured.

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