Academic journal article Social Security Bulletin

Public Pension Reform in Japan

Academic journal article Social Security Bulletin

Public Pension Reform in Japan

Article excerpt

Public Pension Reform in Japan

Summary

The March 2000 pension reform in Japan focused on the long-term financial sustainability of the country's twotiered public pension system. The government opted for incremental changes in order to maintain pension solvency through 2060. Those changes could reduce future pension funding liability by an estimated one-third. Further, the decision to avoid structural reforms of its pension programs was based on fiscal considerations. Expanding general revenue funding for the first tier from the current share of one-third to cover the entire cost would require increases in the consumption tax that proved to be politically unacceptable. Fully privatizing the second, earnings-related tier would entail transition costs too great to bear at a time of rising budget deficits. In addition, the Japanese public generally supported the sharing of financial burden for public pension programs through a combination of benefit cuts, a raise in the pensionable age, and contribution rate increases. If current cost projections prove to be inaccurate, future pension reviews (scheduled every 5 years) will give the government further opportunity to fine-tune program changes.

Introduction

Japan launched its latest pension reform in March 2000 after a review of its public pension programs, which is scheduled every 5 years. The focus of that review was long-term financial sustainability of its public pension system. The Japanese public pension system is a twotiered structure, with a privatized component in the second, earnings-related tier. General revenues supplement employer and employee contributions.

To maintain financial solvency through 2060, the 2000 pension reform introduced a combination of incremental changes-benefit cuts, a raise in the statutory pensionable age, and various revenue enhancements including scheduled increases of contribution rates-to shore up future pension funding. The government rejected two courses of action: assuming the entire cost of the firsttier (universal) pension, and privatizing the entire earnings-related tier.

The reform was driven by an anticipated rapid aging of the population, with no prospects of immediate recovery from the current economic recession and rising unemployment-two conditions that would lead to higher public pension costs with a relative smaller labor force to help pay for it. The government, however, has won continuing support from the public for the policy of costsaving and revenue-enhancing measures that had begun in the mid-1980s (Liu 1987; Takayama 1995).

This note:

* Discusses Japan's underlying demographic and economic prospects;

* Introduces the prereform, two-tiered public pension programs;

* Summarizes the reform process, issues, and options developed during the 2-year pension review;

* Outlines the key changes stipulated by the 2000 pension reform; and

* Discusses the reform's projected impact on future pension costs.

Aging Population and Shrinking Economy

Japan's elderly population is growing rapidly at the same time as its fertility rate is falling. Life expectancies at birth for Japanese men (77 years) and women (84 years) are among the highest in the world. In 1998, the average fertility rate declined to only 1.38 (OECD 1999, 130). One recent comparative study (BIS 1998, 5-7) based on pre-1998 (thus, more optimistic) fertility rates, suggests that Japan's elderly dependency rate-the population aged 65 or older divided by the population aged 15-64-- will be 44.0 percent in 2030 and 56.5 percent in 2050. Japan's 2050 rate is the second highest among the 11 major industrial nations; Italy is the highest with 68.8 percent. In comparison, the United States has the lowest elderly dependency rate among the same 11 countries for both 2030 (33.0 percent) and 2050 (35.2 percent).1

A 1997 government projection shows that Japan's total population is expected to drop to only 40 percent of the current total by 2100. …

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