Social Security Reform in Advanced Countries: Evaluating Pension Finance

By Toshihiro Ihori; Toshiaki Tachibanaki | Go to book overview

6

Switching the Japanese social system from pay-as-you-go to actuarially fair

A simulation analysis

Tatsuo Hatta and Noriyoshi Oguchi


6.1Introduction

Under the current Japanese pension system, the lifetime pension benefit of an average salaried man born in 1935 is greater than his lifetime pension contributions by $500,000. If he were faced with the contribution and benefit schedules that a person born in 2000 faces, his lifetime benefit would be less than his lifetime contribution by $250,000. This means that the net pension benefit is different between the two cohorts by $750,000 even under the assumption that their lifetime incomes are equal. 1

Such extreme inequity between different cohorts is caused by the fact that Japan's public pension system is essentially a pay-as-you-go system.

Recently Hatta and Oguchi (1999) made various reform proposals that would switch the Japanese pension system to an actuarially fair one. They analyzed the future effects of these reform proposals using the Osaka University and Senshu University Public Pension Simulation Model (the OSU model). 2 Among their proposals is the "23 percent Reform Plan" of the Private Sector Employee Pension system.

In this chapter, we will outline the "23 percent Reform Plan" and show its effects both on public fund accumulation and on the net benefits of different cohorts.

Section 1 briefly outlines the current structure of Japan's public pension system, and Section 2 examines its redistributional effects. The pay-as-you-go scheme and the actuarially fair scheme will be compared in Section 3. In Section 4, the 23 percent Reform Plan is analyzed. Privatization is discussed in Section 5.


6.2The Japanese public pension system

3

There are three public pension systems in Japan: the National Pension (NP), the Private Sector Employee Pension (PEP), and the Government and Education Sector Employee Pension (GEP). 4 The NP covers all adults from 20 to 60 years old. The PEP covers employees in the private sector, and the GEP covers employees in the public sector and private schools.

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