Social Security Pension Reform in Japan from Actuarial Viewpoints

Transcription

1 October 22, 2007 Pension Seminar organized by the JSCPA and Nihon Univ. Social Security Pension Reform in Japan from Actuarial Viewpoints Actuaries Course in Nihon University College of HUMANITIES and SCIENCES Masaaki ONO, Research Fellow Mizuho Pension Research Institute Notice: Many slides refer to the wed-sites of MHLW and The National Institute of Population and Social Security Research (English Version).

2 Overview of the Pension System in Japan 1 (EPI) (MAP) (NP) Category 1 Category 3 Category 2

3 Overview of the Pension System in Japan Characteristics of Social Security Pension Schemes 1.Universal Coverage All persons from age 20 to 59 are covered by NP Employees are also covered by EPI or MAP Social Insurance Benefits are determined in relation to the payment of premiums Intergenerational Support Pay-as-you-go Financing with some buffer funds Benefit and Premium Structure 1. Benefits Category 1 and 3 : Basic Pension (BP) from NP (Flat Benefit) Category 2 : BP + Employees Pension (EP) from EPI or MAP (Earning Related) Premiums Category 1 : Flat Premium to NP with Exemption Program Category 2 : Earning Related Premium to EPI or MAP Category 3 : None (included in their Category 2 spouses premiums) 2

4 Communication & Transportation Overview of the Pension System in Japan Benefit Level Basic Pension covers the basic part of the living cost. Employees Pension covers the almost all consumption expenditure of the model elderly household. 3 Furniture & Household Products Clothing & Shoes

5 Overview of the Pension System in Japan Financing Structure of NP, EPI and MAP Employers and Employees pay premiums to EPI or MAP. There is a special account for BP, and each scheme pays contributions to the account when Basic Pension Benefits are due. 4

6 Overview of the Pension System in Japan Financing Structure of NP, EPI and MAP The cost of benefit payment for BP is shared between all schemes based on the number of active insured persons together with the national treasury s subsidy. 5 National Pension Scheme Employees Pension Insurance Mutual Aid Pension Schemes

7 Overview of the Pension System in Japan 6 Adjustments of Pension Benefits Pre 1985 reform 1985 reform Benefit Formula (EPI) Accrual rate 1.0% (monthly wage) 0.75% (monthly wage) Revaluation 1994 reform Net Wage 2000 reform % (annual wage) 2004 reform Wage 60 Wage BP: 65 EPI: 60 Net Wage 65 Price Macroeconomy revaluation Pensionable age Indexation of pensions in payment Macroeconomy indexation Note: Changes in accrual rate and pensionable age are accompanied by transition provisions.

8 Overview of the Pension System in Japan Pensionable Age for Basic Pension (1994 reform) 7

9 Overview of the Pension System in Japan Pensionable Age for Employees Pension (2000 reform) 8

10 9 Revised Population Projection published in 2002 Actual and projected total fertility rate, Previous

11 10 Revised Population Projection published in 2002 Actual and Projected life expectancy at birth, Male: Female: Male: Female: Previous Male: Female: 86.47

12 11 Revised Population Projection published in 2002 Trends in the percentage of the major age composition of the total population, : Medium variant

13 12 Comparison between Projected and Steady State Population thousand 2,500 Population by Age in 2010 Population by Age in 2020 Population by Age in ,000 1,500 1, Projected Steady State Age Population by Age in Population by Age in

14 13 Difference from Steady State Population Thousand Difference from Steady State in

15 14 I. Basic Concept for Reform Sustainable and reliable scheme Life and Work Style-neutral scheme Financially Sustainable Scheme National subsidy for Basic Pensions : 1/3 1/2 (2009) Financial assessment : Every 5 years Fixed premium level : current 13.58% (2004) 18.30% (2017) Macro-economy indexation with the replacement rate floor (50%) Work and Life Style-neutral Scheme Reviewing the benefit adjustment for working pensioners Expanding the coverage of EPI to part-time workers (after 5 years) Child fosterage support measures Women s Pension : Sharing the earning related pension with spouses

16 Statutory Future Premium Rates Schedule 15

17 Introducing Macro-economy Indexation Indexation will be adjusted taking both the decrease in Labor force population and the life expectancy improvement into account. The adjustment would continue until Actuarial Balance were expected to be achieved. 16

18 Change in Period for Actuarial Balance from infinite to finite Actuarial Balance for infinite period n= 2005 PV of n = PV of Premiumsn + n= 2005 ( Benefits Subsidy) Fund Actuarial Balance for infinite period (95 years) 2100 n= 2005 PV of 2099 n = PV of Premiumsn + n= 2005 ( Benefits Subsidy) Fund Funding level is scheduled to be equal to one-year expenditure at the end of the period. Assessment 2004 Assessment 2009 Assessment 2014 Assessment

19 18 Macro-economy indexation and Actuarial Balance Payment without adjustment Adjustment by 15% Adjustment Period Return to current indexation rule PV of Pension Benefits PV of Premiums Fund Rate of decrease in Labor force population + 0.3% (mortality improvement)

20 19 Actuarial Assumptions (Base Scenario) Demographic Assumptions Labor force participation ratio Economic Assumptions

21 20 Result (Adjustment Period and Replacement Ratio for Employees)

22 21 Result (Year-by-year Simulation)

23 22 Result (Structure of Benefit and Source of Payment in EPI) Structure of Benefit Source of Payment From Pension Fund Future Insured Period Premium Past Insured Period Subsidy from Gov.

24 23 Balance sheet of EPI Discount Rate = Assumed Investment Return PV of Future Premium = 1200tril. Future=970 Fund=160 Subsidy=340 BP=370 EP=600 Past=740 BP=310 EP=430 PV of Future Benefits = 1710tril. Discount Rate = Assumed Wage Increase Rate PV of Future Premium = 1830tril. Future=1730 Fund=260 Subsidy=540 BP=680 EP=1050 Past=900 BP=380 EP=520 PV of Future Benefits = 2630tril.

25 What in future? 24 Latest Population Projection Main Point of the new report (Moderate scenario in TFR and Mortality) 2006 Projection 2002 Projection Total Fertility Rate 1.26 (2055) 1.39 (2050) Life Expectancy at birth M: F: (2055) M: F: (2050) Total Population (2050) million million Revision of Economic Assumptions Actuarial Report for 2004 Reform Preliminary Report (Feb. 2007) Price inflation 1.0% 1.0% Wage increase 2.1% 2.5% Rate of Investment Return 3.2% 4.1% Result (Expected Replacement Ratio) Actuarial Report for 2004 Reform Preliminary Report (Feb. 2007) 50.2% 51.6% (Revised Economic Assumptions) 46.9% (Current Economic Assumptions)

26 What in future? Stochastic Projection (Source: NLI Research Institute (2004)) 25 Distribution of Final Replacement Rate Distribution of the year in which Adjustment period ends

27 What in future? Some Concerns Obstacle for the Work and Life style neutral society Because of the adherence of the economic organizations, application of EPI to Part-time workers has not been carried forward so much. Middle term slump of the wage improvement Due to the wage improvement slump, Macro economic indexation has not been activated. It brings about the concern of the financial situation. Level of Basic Pension Macro economic indexation will lower the level of BP so that it would not be able to cover the basic living cost for elderly households. Undue Pessimism Pessimists can easily become White Hat in pension debates. But it is difficult for us to imagine the society that have only 45 million population in