Pension Scheme in Japan

1

Pension Scheme in Japan:Pension Scheme in Japan:Problems and Reform EffortsProblems and Reform Efforts

byby

Noriyuki TakayamaNoriyuki Takayama

Professor of Economics, Hitotsubashi UniversityProfessor of Economics, Hitotsubashi [email protected]@ier.hit--u.ac.jpu.ac.jp

http://www.ier.hithttp://www.ier.hit--u.ac.jp/~takayama/u.ac.jp/~takayama/

IUJ Convocation, 23IUJ Convocation, 23rdrd February 2005 February 2005

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OrganizationOrganization

●● Brief Outline of Pension ProvisionsBrief Outline of Pension Provisions

●● DemographyDemography

●● Basic Facts: Basic Facts:

Identifying Main JPN ProblemsIdentifying Main JPN Problems

●● The 2004 Reform BillThe 2004 Reform Bill

●● Future Policy OptionsFuture Policy Options

●● Concluding RemarksConcluding Remarks

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Brief Outline of Pension ProvisionsBrief Outline of Pension Provisionsbefore the 2004 Reformbefore the 2004 Reform

●● 22--tier Benefitstier Benefits

●● ContributionsContributions

●● The Biggest BusinessThe Biggest Business

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TwoTwo--tier Benefits (DB)tier Benefits (DB)

●● Basic FlatBasic Flat--rate Benefits (PM, PP)rate Benefits (PM, PP)

66,200 yen = USD 63066,200 yen = USD 630

●● EarningsEarnings--related Benefits (40Yrs)related Benefits (40Yrs)

28.5% of Career Average Monthly Real 28.5% of Career Average Monthly Real EarningsEarnings

●● Replacement Rate (OneReplacement Rate (One--earner Couple)earner Couple)

Around 60% Net (233,000 yen = USD 2,200)Around 60% Net (233,000 yen = USD 2,200)

●● CPI IndexationCPI Indexation

●● Normal Normal PensionablePensionable Age: 65Age: 65

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Contributions/Transfer from GRContributions/Transfer from GR

●● ContributionsContributions

13.58% of 13.58% of AnnualAnnual WagesWages

13,300 yen = USD 125 (PM, PP)13,300 yen = USD 125 (PM, PP)●● Subsidy from General RevenueSubsidy from General Revenue

1/3 of Flat1/3 of Flat--rate Basic Benefitsrate Basic Benefits●● Mainly PAYG, but Mainly PAYG, but

with Partial with Partial PrefundingPrefunding

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The Biggest Business in JapanThe Biggest Business in Japan

●● Aggregate SS Pension Benefits Aggregate SS Pension Benefits

44 tr. Yen = USD 420 billion in 200344 tr. Yen = USD 420 billion in 2003

(9% of Japanese GDP)(9% of Japanese GDP)

cf. The Automobile Industrycf. The Automobile Industry

40 tr. Yen (Domestic Output in 2000)40 tr. Yen (Domestic Output in 2000)

●● Rapidly GrowingRapidly Growing

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DemographyDemography

●● TFRTFR

●● Total No. of PopulationsTotal No. of Populations

●● Proportion of 65+Proportion of 65+

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1945 1955 1965 1975 1985 1995 2005 2015 2025 2035 2045YEAR

1.29 in 2003

1.63

1.39

1.10

high variant

low variant

medium variant

Source: National Institute of Population and Social Security Research (2002), Population Projections for Japan: 2001-2100

Trends in the Total Fertility Rate of Japan

9

0

20

40

60

80

100

120

140

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100YEAR

(million)

low variant

medium variant

high variant


Actual and Projected Population of Japan

10

0

5

10

15

20

25

30

35

40

45

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100YEAR

(%)

Year 2005 20.0% (Japan)

high variant

medium variant

low variant


Proportion of the Elderly (+65) in Japan

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Basic Facts Basic Facts

●● Deficit in Current AccountDeficit in Current Account●● Balance Sheet:Balance Sheet:

Huge Excess LiabilitiesHuge Excess Liabilities●● SS Pension Contributions:SS Pension Contributions:

Heavy Burdens OutstandingHeavy Burdens Outstanding●● Too Much Income Transfers between Too Much Income Transfers between

GenerationsGenerations

●● Increasing DropIncreasing Drop--outout

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2.08

-2.84

3.95

-0.70 -0.61

-4-3-2-1012345

1999 2000 2001 2002 2003(YEAR)

(trillion yen)

Current Account of the KNH

13

920 1100

130

0

500

1,000

1,500(Tr Yen)

PensionLiabilities

Transfers

Contri-butions

((as at 31as at 31stst March 2005March 2005））

Excess LExcess L：：50 Tr. Yen50 Tr. Yen

800

170

130

0

500

1,000

1,500

PensionLiabilities

F.R.Transfers


Part One (PAST)Part One (PAST) Part Two (FUTURE)Part Two (FUTURE)

KNH Balance Sheet:KNH Balance Sheet:Before ReformBefore Reform

Assets Liabilities Assets Liabilities

1,050

（Tr Yen）

14

55.6 43.9

0

10

20

30

40

50

60

SS Contributions Tax (Central Gov.t)

(trillion yen)

Which Is More, SS Contributions or Tax Revenues?FY 2003 National Budget, Japan

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13.811.9

29.0

17.59.1

0

5

10

15

20

25

30

35

Consumption Tax Personal IncomeTax

SS PensionContributions

SS Health CareContributions

Corporate IncomeTax

(trillion yen)

Main Income Sources of Japan’s Central GovernmentFY 2003 National Budget, Japan

16

0

50

100

150

200

250

300

350

0-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79 80

+ Age

(10,000 yen)

before Redistribution after Redistribution

Source: Ministry of Health and Welfare, The 1996 Income Redistribution Survey

Per-capita Income by Age in Japan

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O thers11%

Interestand

Dividends5%

Wagesand

Salaries6%

SSPensionBenefits

78%

median income: 3.38 million yenSource: The 1989 NSFIE (elderly couples: median income group)

SS pension benefits are the major source of retirement income

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Drop-out from SS Pensions (Non-employees)Delinquency in Paying Pension Contributions

37.2

15

20

25

30

35

40

1996 1997 1998 1999 2000 2001 2002 YEAR

%

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The 2004 Reform Bill (1) The 2004 Reform Bill (1)

●● Increasing ContributionsIncreasing Contributions

by 0.354 point Every Yearby 0.354 point Every Year

→→18.30% from 2017 onwards 18.30% from 2017 onwards

by 280 yen Every Yearby 280 yen Every Year

→→16,900 yen from 2017 onwards16,900 yen from 2017 onwards

●● Increasing Subsidies Increasing Subsidies

FlatFlat--rate Basic Benefits (1/3rate Basic Benefits (1/3→→1/2)1/2)

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The 2004 Reform Bill (2) The 2004 Reform Bill (2)

●● Reducing Benefits by Considering Reducing Benefits by Considering ““Demographic FactorsDemographic Factors”” in Indexing in Indexing Benefits between 2005 and 2023Benefits between 2005 and 2023

Replacement Rate for a Replacement Rate for a ““ModelModel”” CoupleCouple

Benefits at Age 65:Benefits at Age 65:

60% (2004) 60% (2004) →→ 50% (2023) 50% (2023)

Current Pensioners:Current Pensioners:

60% (Age 65) 60% (Age 65) →→ 43% (Age 84)43% (Age 84)

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40

45

50

55

60

65 70 75 80 85

(Age)

(%)

born in 1939born in 1944born in 1949born in 1954born in 1959

Replacement RateReplacement Rate

22

1200

970

190

0

500

1,000

1,500(Tr Ye n)

C ontri -butions Pe nsion

Liabi l i tie s

Transfers (G R)

(as at 31st March 2005(as at 31st March 2005））

Excess AExcess A：：420 Tr. Yen420 Tr. Yen

170740

150

0

500

1,000

1,500(Tr Yen)

PensionLiabilities

F.R.

Transfers (GR)



KNH Balance Sheet: KNH Balance Sheet: After ReformAfter ReformIncentiveIncentive--compatible?compatible?


320

1,390

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Future Policy OptionsFuture Policy Options

●● Strengthening IncentiveStrengthening Incentive--CompatibilityCompatibility

Shift to NDCShift to NDC

●● Handling Legacy PensionsHandling Legacy PensionsDiminishing Excess LiabilitiesDiminishing Excess Liabilities

●● Strengthening Private InitiativesStrengthening Private Initiatives

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Strengthening IncentiveStrengthening Incentive--CompatibilityCompatibilityShift to NDCShift to NDC

●● Direct Link between Contributions Direct Link between Contributions

and Pension Benefitsand Pension Benefits

““Every Yen CountsEvery Yen Counts””

→→Increased CredibilityIncreased Credibility

25Handling Legacy PensionsHandling Legacy PensionsThree OptionsThree Options

●● Reducing BenefitsReducing Benefits

●● Increasing ContributionsIncreasing Contributions

●● Increasing SubsidiesIncreasing Subsidies

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920970

50

0

500

1,000

1,500(Tr Yen)

C ontributionsPe nsion

Liabi l i tie s

Transfers (G R)

(as at 31st March 2005(as at 31st March 2005））

Excess AExcess A：：0 Tr. Yen0 Tr. Yen

170 740

290

280

0

500

1,000

1,500

PensionLiabilities

F.R.

Transfers (GR)

Consumption Tax

(Tr Yen)



KNH Balance SheetKNH Balance Sheet：：Alternative ReformAlternative Reform


970

740

27Conclusions (1)Conclusions (1)Importance of the Balance SheetImportance of the Balance Sheet

●● describe the current financial situationsdescribe the current financial situations

●● imply how smoothly SS benefits are imply how smoothly SS benefits are financed in the futurefinanced in the future

●●assess impacts of alternative policy assess impacts of alternative policy measures on future financingmeasures on future financing

●●The BS will be in a huge deficit even if the The BS will be in a huge deficit even if the income statement of SS pensions enjoys income statement of SS pensions enjoys a surplusa surplus

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Conclusions (2)Conclusions (2)

●● How to provide adequate income to older How to provide adequate income to older persons, while keeping the SS pension persons, while keeping the SS pension schemes financially sustainable?schemes financially sustainable?

Theory of Policy AssignmentTheory of Policy Assignment

Automatic Balancing MechanismAutomatic Balancing Mechanism

What Matters is the Taste of PieWhat Matters is the Taste of Pie

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ReferencesReferences

1.1. N. N. TakayamaTakayama, , ““The Balance Sheet of Social The Balance Sheet of Social Security Pensions in Japan,Security Pensions in Japan,”” PIEPIE--DP, No.235, DP, No.235, 2004.2004.

2.2. N. Ogawa and N. N. Ogawa and N. TakayamaTakayama, , ““Demography Demography and Ageing,and Ageing,”” PIEPIE--DP, No.251, 2005.DP, No.251, 2005.

3.3. Website:Website:www.ier.hitwww.ier.hit--u.ac.jp/~takayama/indexu.ac.jp/~takayama/index--e.htmle.html

www.ier.hitwww.ier.hit--u.ac.jp/pie/English/discussionpaper/index.htmlu.ac.jp/pie/English/discussionpaper/index.html

Pension Scheme in Japan

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