Pension Scheme in Japan:

Transcription

1 1 Pension Scheme in Japan: Problems and Reform Efforts by Noriyuki Takayama Professor of Economics, Hitotsubashi University IUJ Convocation, 23 rd February 2005

2 Organization 2 Brief Outline of Pension Provisions Demography Basic Facts: Identifying Main JPN Problems The 2004 Reform Bill Future Policy Options Concluding Remarks

3 Brief Outline of Pension Provisions 3 before the 2004 Reform 2-tier Benefits Contributions The Biggest Business

4 Two-tier Benefits (DB) 4 Basic Flat-rate Benefits (PM, PP) 66,200 yen = USD 630 Earnings-related related Benefits (40Yrs) 28.5% of Career Average Monthly Real Earnings Replacement Rate (One-earner earner Couple) Around 60% Net (233,000 yen = USD 2,200) CPI Indexation Normal Pensionable Age: 65

5 Contributions/Transfer from GR 5 Contributions 13.58% of Annual Wages 13,300 yen = USD 125 (PM, PP) Subsidy from General Revenue 1/3 of Flat-rate Basic Benefits Mainly PAYG, but with Partial Prefunding

6 The Biggest Business in Japan 6 Aggregate SS Pension Benefits 44 tr. Yen = USD 420 billion in 2003 (9% of Japanese GDP) cf. The Automobile Industry 40 tr. Yen (Domestic Output in 2000) Rapidly Growing

7 Demography 7 TFR Total No. of Populations Proportion of 65+

8 Trends in the Total Fertility Rate of Japan in high variant medium variant low variant YEAR S ource: National Institute of Population and S ocial S ecurity Research (2002), Population Projections for Japan:

9 Actual and Projected Population of Japan 9 (million) low variant high variant medium variant YEAR Source: National Institute of Population and Social Security Research (2002), Population Projections for Japan:

10 Proportion of the Elderly (+65) in Japan (%) high variant medium variant low variant Year % (Japan) 5 0 YEAR Source: National Institute of Population and Social Security Research (2002), Population Projections for Japan:

11 Basic Facts 11 Deficit in Current Account Balance Sheet: Huge Excess Liabilities SS Pension Contributions: Heavy Burdens Outstanding Too Much Income Transfers between Generations Increasing Drop-out out

12 Current Account of the KNH 12 (trillion yen) (YEAR)

13 (Tr Yen) 1,500 KNH Balance Sheet: Before Reform (Tr Yen) 1,500 (as at 31 st March 2005) 13 Excess L:50 L Tr. Yen 1,000 Excess L:500 L Tr. Yen 1,000 Transfers 1, Transfers F.R. 130 Pen s io n Liabilities Contributions 920 Pension Liabilities Assets Liabilities Assets Liabilities Part One (PAST) Part Two (FUTURE)

14 Which Is More, SS Contributions or Tax Revenues? FY 2003 National Budget, Japan 14 (trillion yen) SS Contributions 43.9 Tax (Central Gov.t)

15 Main Income Sources of Japan s Central Government FY 2003 National Budget, Japan 15 (trillion yen) Consumption Tax Personal Income Tax SS Pension Contributions SS Health Care Contributions Corporate Income Tax

16 Per-capita Income by Age in Japan 16 (10,000 yen) before Redistribution after Redistribution Age Source: Ministry of Health and Welfare, The 1996 Income Redistribution Survey

17 SS pension benefits are the major source of retirement income 17 Interest and Dividends 5% Wages and Salaries 6% Others 11% SS Pension Benefits 78% Source: The 1989 NSFIE (elderly couples: median income group) median income: 3.38 million yen

18 Drop-out from SS Pensions (Non-employees) Delinquency in Paying Pension Contributions 18 % YEAR

19 The 2004 Reform Bill (1) 19 Increasing Contributions by point Every Year 18.30% from 2017 onwards by 280 yen Every Year 16,900 yen from 2017 onwards Increasing Subsidies Flat-rate Basic Benefits (1/3 1/2) 1/2)

20 The 2004 Reform Bill (2) 20 Reducing Benefits by Considering Demographic Factors in Indexing Benefits between 2005 and 2023 Replacement Rate for a Model Couple Benefits at Age 65: 60% (2004) 50% (2023) Current Pensioners: 60% (Age 65) 43% (Age 84)

21 Replacement Rate (%) born in 1939 born in 1944 born in 1949 born in 1954 born in (Age)

22 KNH Balance Sheet: After Reform (Tr Yen) 1,500 1,000 Incentive-compatible? compatible? Excess L:420 L Tr. Yen (Tr Yen) 1,500 1,000 Transfers (G R) 190 (as at 31st March 2005) Excess A:420 A Tr. Yen 1, Pension 500 Contributions 1200 Pension Liabilities 320 Liabilities Transfers (GR) F.R Assets Liabilities Assets Liabilities Part One (PAST) Part Two (FUTURE)

23 Future Policy Options 23 Strengthening Incentive-Compatibility Shift to NDC Handling Legacy Pensions Diminishing Excess Liabilities Strengthening Private Initiatives

24 Strengthening Incentive-Compatibility 24 Shift to NDC Direct Link between Contributions and Pension Benefits Every Yen Counts Increased Credibility

25 Handling Legacy Pensions 25 Three Options Reducing Benefits Increasing Contributions Increasing Subsidies

26 KNH Balance Sheet: Alternative Reform (as at 31st March 2005) 26 (Tr Yen) 1,500 (Tr Yen) 1,500 Excess A:0 A 0 Tr. Yen 1,000 Excess L:0 L 0 Tr. Yen 1, Transfers (G R) Consumption Tax 280 Transfers (GR) 290 F.R. Pension Liabilities Contributions 920 Pension Liabilities Assets Liabilities Assets Liabilities 970 Part One (PAST) Part Two (FUTURE)

27 Conclusions (1) 27 Importance of the Balance Sheet describe the current financial situations imply how smoothly SS benefits are financed in the future assess assess impacts of alternative policy measures on future financing The The BS will be in a huge deficit even if the income statement of SS pensions enjoys a surplus

28 Conclusions (2) 28 How to provide adequate income to older persons, while keeping the SS pension schemes financially sustainable? Theory of Policy Assignment Automatic Balancing Mechanism What Matters is the Taste of Pie

29 29 References 1. N. N. Takayama, The Balance Sheet of Social Security Pensions in Japan, PIE-DP, No.235, N. Ogawa and N. Takayama, Demography and Ageing, PIE-DP, No.251, Website: u.ac.jp/~takayama/index-e.htmle.html