Japan's Pension Fund Battleground

By Shibata, Yoko | Global Finance, January 1999 | Go to article overview

Japan's Pension Fund Battleground


Shibata, Yoko, Global Finance


Because of Japan's prolonged economic collapse and the generally poor state of investment management in the country, many of its corporate pension funds are not able to meet their liabilities. Japan's LTCB Research Institute puts corporate pension underfunding at Y60-80 trillionnot far behind the Y87.6 trillion in bad loans hanging over the country's banks. A problem? Yes, but a minor one compared with the crisis affecting public pensions.

Japan's social security system faces the same prospect as the US social security system and indeed other pay-as-you-go systems in the industrialized world: an increasingly smaller workforce supporting an increasingly larger retired group through ever larger premiums. But Japan's situation is aggravated by several factors. One is that Japan's population is aging more rapidly than any other country's. In 2020 one out of four Japanese will be over 65. Another is the difficulty of raising premiums in a time of deep recession. Still another is that many do not contribute to the basic social security system, which is supposed to cover everyone, workers and nonworkers alike.

The Ministry of Health and Welfare has been working on reform measures, but dissatisfaction with its progress and with the Ministry of Finance's management of the system's funds has led the ruling Liberal Democratic Party to take the matter out of the hands of the bureaucrats and draw up a social security reform bill of its own to be presented to the parliament early next year. The issues involved are formidable.

Japan actually has two social security systems, a basic one, in which every citizen in Japan is eligible to participate, and a second one, which covers only employed persons, the premiums for which are shared 50-50 by employees and employers. The two plans together are supposed to provide a retirement benefit equal to 45% of pre-retirement income.

The premium of the employee system was scheduled to be raised from 17.35% to 19.5% of monthly salary next April and thereafter raised by 2 percentage points every five years until it reached 35% in 2025. Fearing the dampening effect on consumer spending, the Obuchi government tabled the 1999 hike. Meanwhile, the MHW has been working on a bill that would raise the retirement age from 60 to 65 and rein in the rate of increase in the premium so that in 2025 it would reach only 26%. At the same time, the ministry has proposed raising the premiums of the basic social security-the one that is supposed to cover everyone-by Y500 annually.

Widely perceived to be unfair, this system suffers from the fact that onethird of all Japanese do not pay into it. Some are university students, who are expected to contribute once they reach age 20, even before they are earning any income. Others are unmarried working women, who perceive that at retirement they will receive half the monthly benefits of a married couple, even though only the husband of the couple has contributed to the fund. Wives with income of less than Y1,300,000 annually are not expected to make any contribution at all. Still other nonpayers are those who simply cannot afford the flat monthly premium of Y13,300.

The payout is miserly: The average monthly benefits are only Y45,831 per person, or just over Y90,000 for a couple. That's less than half the average of Y216,150 a month an elderly couple (70 years or more) on relief receives.

The MHW is proposing that the government raise the payments it makes to the basic system from one-third to one-half and make up the difference by raising the national consumption tax.

But many are suggesting that the crisis proportions of the situation are something of a hoax perpetrated by the Ministry of Finance. In 1996 the total reserves of all public pension funds amounted to Y171.3 trillion-enough to pay all benefits for 5.2 years. By contrast, the United States maintains about a year's worth of reserves in its social security system, Germany and France only a few months' worth. …

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