PENSIONS AND SOCIAL SECURITY IN JAPAN
Social security programs in Japan are designed to guarantee a minimum standard of living and to protect citizens from certain types of social and economic risk. The social security system consists of four major components: public assistance, social insurance, social welfare services, and public health maintenance. With the average age of the Japanese population rising rapidly because of a falling birth rate and increasing life spans, it is inevitable that the total population will soon begin to fall. In this environment, the issues of how to pay for and restrain the growing pension, medical care, and nursing care burden have become critical ones as society seeks to create a humane and sustainable social security system. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
There are currently two main pension systems: one for company workers and one for government workers. After it was revealed that government workers received preferential treatment in the government system---with the average public servants receiving ¥1.43 million more in additional pension payments than salaried workers---there was discussion about merging the pension systems.
Most Japan pay about a $100 a month into a pension system regardless of how much they earn. Self-employed sometimes don't pay into system Non-working housewives pay nothing into the social security system but are entitled to full pensions. Currently pensioners receive tax deductions.
Currently pension payments for a person who worked as company employee and was married to a person who did not work around is ¥233,000 a month, about 59 percent of an average monthly take home pay.
People over 75 are only required to pay 10 percent of medical costs incurred at hospitals. One municipality in Tokyo (Hinodemachi) has promised to provide free health care for the elderly starting in 2009.
Development of a Modern Social Security System in Japan
At the end of the 1950s, the establishment of two laws---the National Health Insurance Law and the National Pension Law---made self-employed persons, those engaged in agriculture, and others with no previous access to social insurance policies eligible for national pensions and national health insurance. Beginning in April 1961, a universal health insurance system and and pensions for all Japanese citizens were put into effect. This social welfare regime was supported by government financial resources, which were adequate under the prevailing conditions of rapid economic growth. Steadily, it developed as the basic system underpinning the people’s welfare. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
In 1973, a time some people called the “First Year of the Welfare Era,” a revision of the Welfare Law for the Aged eliminated healthcare fees for older citizens, while a revision of national health insurance regulations boosted the percentage of national coverage for family medical expenses. Revised national pension regulations raised pension levels and introduced a sliding scale (reflecting changes in commodity prices) that benefited, in particular, the neediest recipients. With the oil crises of 1973 and 1979, Japan entered an era of welfare constraints. [Ibid]
In 1983, the Health and Medical Service Law for the Aged was enacted. This law mandated that the cost of geriatric medical treatment should be covered not only by National Health Insurance but by employee, cooperative, and other health insurance plans in order to reduce the national treasury’s outlays for the National Health Insurance Plan. Moreover, senior citizens themselves were to pay a fixed price for medical treatment. In April 1986, a new pension system was inaugurated. This pension reform aimed, above all, to establish a system that could be maintained under the conditions of Japan’s aging society. [Ibid]
Japan’s social security benefits came to ¥94.8 trillion in fiscal 2008, or ¥736,800 per capita, an amount that has risen in pace with the rapid aging of the population. Pensions accounted for 52.8 percent of the total, medical spending for 31.7 percent, and welfare and other expenses for 15.5 percent. Social security benefits for the elderly came to ¥63.6 trillion, or about 69.5 percent of the total. In terms of government spending, social security related outlays made up ¥28.7 trillion of the fiscal 2011 budget and 31.1 percent of all expenditures in the general account budget. The proportion, however, rises to 41.3 percent, or nearly 50 percent when government bond-related expenses and local government subsidies are excluded. The ratio, which was 26.7 percent in fiscal 1980, has exceeded 40 percent since fiscal 1999, reflecting the rapid increase in the number of elderly people. [Ibid]
Concerns about the graying of the population first surfaced in 1994, when the ratio of elderly people surpassed 14 percent. Around the same time, the number of children also began declining conspicuously. In 2005 the total fertility rate hit a record low of 1.26. Since then the rate has risen slightly but remains low. The upshot of this trend will be a marked decline in the ratio of people of productive ages, from 15 years to 64 years of age, to elderly person 65 years of age or older, from 4.4 in 1995 to a projected 2.1 in 2025. [Ibid]
Japanese Pension System
Given the rapid aging of society and the fact that there will soon be a downward population trend due to the dropping birth rate, social security systems, including pensions, need to be reexamined. As already mentioned, in 1961 a system was put into effect whereby all Japanese citizens could receive pensions. These pensions were of three types: the “national pension” (kokumin nenkin) for self-employed persons, “employees’ pensions” (kosei nenkin) for salaried persons, and “mutual aid pensions” (kyosai nenkin) for civil servants. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“Then, beginning in 1986, a two-tier pension system was established whereby the entire population is eligible to receive a national pension, to which employees’ pensions and mutual aid pensions are added for those people eligible. Thus, at present, the first tier of the two-tier pension system is the national pension, to which people contribute between ages 20 and 60 and which begins paying benefits at age 65. [Ibid]
“For the national pension, the insured population is classified into three groups with respect to their methods of pension insurance contribution and eligibility for receiving second-tier payments. “Category 1 insured persons” are students and the self-employed, who make their insurance contributions as individuals. “Category 2 insured persons” are largely salaried persons working for companies, the government, etc., while “Category 3 insured persons” are spouses who are supported by persons in Category 2 and are exempt from insurance contributions. [Ibid]
“The most serious effect of the trend in Japan toward having fewer children is a decrease in the number of persons supporting the burden of social security expenditures. Related to this are the inequalities in taxes and social insurance contributions. For example, strong opinions have been expressed about burden inequalities between, on the one hand, “Category 3 insured persons” (i.e., full-time housewives) and, on the other hand, income-earning single and married women. The increase in the number of people who either do not enroll in the national pension at all or who do not make the specified monthly payments is also a major problem. [Ibid]
Pensions, Social Security and Problems in Japan
One of the biggest problems that Japan is facing in the future is how to pay for the pensions of its rapidly of its rapidly aging society. According to Bloomberg: “A combination of the world’s highest life expectancy, the world’s second-largest public debt and a below- replacement birthrate is straining the nation’s pension system, prompting the government to curb payouts, raise contributions and delay the age of eligibility. “
The pension system is severely underfunded. People who receive benefits are receiving more than people are putting in and people who are paying into the system ow are expected to get less than they put in. The pension system ran up a deficit of $7.7 billion in 2003 and could collapse as early as 2025 unless something is done. In a survey in 2003, 57 percent of those asked said they distrusted the pension system.
In 2006, the cost of public pensions, health care and welfare service for the aged reached a record $828 billion’six times higher than in 1986. Costs began accelerating in 2007 when large numbers of baby boomers retired and began getting pension payments. By 2025, pensions could eat up as much as 28 percent of GDP.
There are also worried about rising health care cost and the government’s ability to covers these and pensions. The fact that Japan has a huge national debt and young people and the self-employed are increasingly trying to avoid paying their pension payments doesn’t help matters in terms of coming up with revenues. In 2001, 46 percent of those between 20 and 24 didn’t pay up.
Solutions to the Social Security Problem
Most everyone in Japan agrees that some kind of pension reform is urgently needed as there currently is not enough money in the system to pay all the benefits it has promised in the future. The biggest problem, is where to secure new funds.
Pension reform legislation passed in 2004 called the gradual raising of pension premiums and a reduction of benefits due to the difficulty of financing the system in the face of declining birthrate and an aging population. In 1994, the government raised the age from which pension benefits become available from 60 to 65, a change that is began being gradually implemented in 2001 and will continue to 2013.
There has been some discussion of gradually raising the consumption tax from 5 percent to 16 percent to increase revenues. In the past when the consumption tax was raised consumers spent less and Japan went into a recession. Other suggestions include raising the retirement, reducing pensions for the wealthy, investing pension funds in the stock market and encouraging women to have more babies. The government is also studying the idea of giving of higher pensions to the poor.
Surveys indicate that many Japanese believe that raising the retirement age is the best way for the government to finance services of its aging population.
Solutions to the problem of paying increased health costs for the aged include creating insurance for nursing homes, doubling medical costs for relatively affluent patients.
Some have suggested that the best thing to do is allow more immigrants into the country to provide cheap labor for needed services. One demographer told the Washington Post that this "would require dramatic changes in immigration law, as well as dramatic changes in thinking." The growth if non-Japanese cultures "would be very difficult to maintain in highly populated areas without substantial social ruptures."
The DPJ wants to use the consumption tax exclusively for welfare, social security programs.
Pension Crisis in Japan
In April 2007, the Social Insurance Agency announced that it could not identify the holders of about 50 million pension accounts into which payments had already been made under the corporate employees pension and national pension programs
In March 2008, the government admitted it could not identify 20 million pension account holders, or 40 percent of the 50 million cases. Health, Labor and Welfare Minister Yoichi Masuzoe said the hunt for the identity of the pension holders could be “endless.”
People who work for companies generally have been able to produce records that show they made pension payments and are entitled to get what is owed them. Others---especially people who are self-employed or worked for companies that are out of business and can’t produce records---are being denied pension payments because they can not prove they paid into the system even in all likelihood they probably did. .
Pension funds in Japan suffered a ¥10 trillion loss in yields in fiscal 2008-2009 due to losses in stocks and bonds during the global financial crisis in 2008 and 2009.
Reforming the Japanese Pension System
From the mid-1990s onward the government has been implementing structural reforms to the social security system as a whole in order to address issues related to the increase in social security benefit payments, the stagnation of the Japanese economy, the worsening of government finances, and the diversification of social security program needs. In order to improve the financial viability of the public pension system, in March 2000 the government passed a package of pension reform bills which reduce benefit levels while avoiding adding to the contribution burden of the working population. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“Beginning in April 2000, employees’ pension benefits for new recipients were cut by 5 percent, and the wage-slide system was frozen, with adjustments being made only based on consumer price index changes. In addition, the age at which employees’ pension benefits are received is being raised from 60 to 65. It will rise to 61 in 2013 for men and in 2018 for women, followed by subsequent one-year increases made every three years. The final level of age 65 will be reached in 2025 for men and 2030 for women. [Ibid]
“Pension system reform measures passed in 2004 raised the pension contribution amounts for both the national pension and employee’s pensions, and specified the raising of the ratio of the national pension financing burden borne by the national treasury from one-third to one-half by 2009. The Ministry of Health, Labour and Welfare has released a “balance sheet” showing estimated pension revenue and expenditures through the year 2100. These estimates have projected that a large revenue shortfall will develop. This being the case, if Japan’s birthrate continues to drop as expected, the government could be hard pressed to maintain the currently promised pension system benefit levels. [Ibid]
Introduction of a Long-Term Care Insurance System
As the average age of the population increases, the number of elderly requiring long-term care is growing rapidly. At the same time the percentage of the elderly living with younger family members, while still high compared to many other countries, is falling, and the average age of family caregivers is increasing. As of 2010 approximately 4.9 million people had been officially recognized as requiring long-term care. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“In an attempt to address the care needs of such people, in 1997 the Diet passed the Long-Term Care Insurance Law, which led to the creation of a nursing care insurance system for the elderly in 2000. This system collects obligatory insurance contributions from a broad sector of the population (all persons aged 40 or older) and provides such services as home visits by home helpers, visits to care centers, or long-term stays in nursing homes for older persons suffering from senile dementia or confined to bed for health reasons. In each individual case, the need for such services has to be certified by city, town, and village offices in charge of administering the nursing care insurance system. [Ibid]
“Insurance contributions from persons aged 65 and over (“Type 1 insured persons”) are collected by the local administrations in the form of deductions from these persons’ pensions, while contributions from “Type 2 insured persons” between the ages of 40 and 64 are collected together with health insurance contributions as a lump sum. Beneficiaries of the system must be at least 40 years old and must pay, in addition to the regular insurance contributions, 10 percent of the cost of services received. The financing for Japan’s nursing care insurance system comes 25 percent from the national government, 12.5 percent each from prefectural and local governments, and 50 percent from insurance contributions. A 2005 revision to the Long-Term Care Insurance Law added an emphasis on prevention aimed at helping those with relatively mild problems to maintain and improve their conditions, and thereby avoid deteriorating to the point where extensive care is necessary. This preventive care management is handled by community-based comprehensive support centers. [Ibid]
Japanese Government Plans to Put off Pension Benefits to 68
In October 2011, the Yomiuri Shimbun reported: “The health ministry is considering raising the age at which people can start receiving corporate employee pension benefits to 68, and possibly as high as 70, according to three plans it submitted to the health minister's advisory body.
Under the current schedule on the corporate employees' pension system, the ministry will raise the pensionable age to 65 from the current 60 in several stages. The gradual transition is to be completed by fiscal 2025 for men and by fiscal 2030 for women. The ministry plans to match the pensionable age of the corporate employees' pension program with that of the basic pension program in the future. However, the ministry deems it necessary to start considering raising the pensionable age further or more quickly---or both---to stabilize financial sources for the pension programs in consideration of the nation's rapidly aging population and chronically low birthrate.
The Health, Labor and Welfare Ministry submitted three plans to raise the pensionable age to a meeting of the pension committee of the Social Security Council, an advisory body to the health, labor and welfare minister. The basic difference among the three plans is the speed at which they would raise the pensionable age.
Plan 1 will raise the pensionable age up to 65. It will raise the pensionable age by one year every two years, accelerating the pace of the current schedule, which raises the age by one year every three years. Plan 2 follows the current schedule until the pensionable age is raised to 65, and then continues raising the age by one year every three years, along with the pensionable age of the basic pension program, until it reaches 68. Plan 3 does not follow the current schedule at all. Under Plan 3, the pensionable age will be raised by one year every two years until the pensionable age reaches 68.
Once one of the three plans is adopted, it will greatly influence people's lifestyle after retirement. For example, a man now aged 40 cannot receive corporate employees' pension benefits from ages 60 to 64 under any of the three plans. If the current schedule or Plan 1, aiming at raising the pensionable age up to 65, is carried out, such men can receive corporate employees' pension benefits at the age of 65. However, under Plan 2 and Plan 3, they cannot receive the benefits until 68.
Image Sources: 1) 2) Doug Mann Photomann 3) 4) Ray Kinnane
Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
© 2009 Jeffrey Hays
Last updated January 2013