Sorimachi Speaks

'THE SHAPE OF JAPAN IN THE 21st CENTURY' SERIES,
No. 25

TOWARDS A COHERENT PENSION SYSTEM

1.	Distinguishing between the pension and welfare payments, health insurance and employment insurance
	People strive first of all for their own survival. However we realize that in order to survive we need the cooperation of others, in particular of parents and close relatives. Next, as states are born and develop people make lifestyles, health, education and nursing care appropriate to the developmental level of each state available for other citizens. This is the birth of the ideas of the welfare state and of the social state and Japan is now at this stage. In concrete terms this means [1], the creation of the Livelihood Protection Law for people who cannot make ends meet on their own and the payment of monthly cash benefits to support these people, to enable them to live the most basic of existences. Next is [2], the construction of a health insurance system. People often meet with unexpected accidents or contract illnesses and when this happens a society can hardly expect people who can't pay for their own medical care to die without treatment. It is obvious that they must be given aid through a state system. Lastly, there is [3], the establishment of employment insurance. This is a time when even workers who devote themselves to their jobs can lose them for reasons not the sole responsibility of the worker. States are therefore resorting to measures to secure employment stability and worker livelihoods. This brings us to the nature of the pension. Some people wish to enjoy life to the full even after 65 and are increasingly active in old age. It stands to reason that many have put away considerable savings over their lifetime. It follows that each person should be allowed to plan their own life, including in their old age. However, if the principles of the social state extend even to this area, the state supports the lifestyle of the elderly, increasing peace of mind by the payment of a certain amount of cash. This is the pension system. The features of the pension differ from the insurance system in that cash payments are made even to the healthy. Whilst livelihood protection is support to ensure an absolute minimum standard of living, the pension is a payment that makes a better-than-minimum lifestyle possible.

2.	The principles of the pension system
	The pension system is an aid system where state support enables the elderly to live free of anxiety. This means it was not needed in the Japan of old, where parents looked after children and the children then looked after their parents. However, rapid postwar economic development began to break down the existing system of interdependence within families. The pension system of the time, which covered only salaried workers, was extended to cover self-employed persons, farm workers and others who had been outside its ambit, bringing about a pension for everyone. As pension methods go, the first is [1], for a worker to save up during the working years and for that worker to receive the saved money back from the state after reaching old age. This is the 'savings-method pension'. If monies are saved solely for one's own use this become the same as a fixed term deposit. As each generation of workers use their own savings for their own old age this system can be called same-generation support. Second is [2], the 'levy system' where the current generation of younger workers supports the current generation of elderly. Payments from the current generation of workers are not used for their own old age but for the benefit of those who are elderly now. This is called previous-generation support. Japan's pension system is run using this levy system and this is its greatest challenge today. This is because in an aging society with a falling birthrate there are many elderly pension recipients but few younger workers shouldering the burden of paying for that pension, making it unavoidable that the amount of the contributions burden increases. Further, when younger workers are expected to look after the unknown elderly who are not their parents, some refuse. Turning to the contributions burden borne by the current workforce, firstly [1], we are currently using a system where we calculate the number of elderly (currently those 65 years or older) in need of support and multiply that by the necessary benefit amount to determine the benefit (a defined benefit pension system). Under this method it is obvious that as the aging of society and falling birthrate progress the burden on each individual will increase, leading to significant problems. An alternative system is [2], to decide the burden on the individual in advance and pay benefits within those limits. This is a defined contributions pension system. As it begins with defining the burden on the individual it has the advantage of being unaffected by the tempest of an aging society and falling birthrate, however it is possible that benefit amounts will fall under a levy system.

3.	Why do some refuse to pay pension contributions?
	If it were the case that pension contributions were for a worker's own future pension, then non-payment would not appear to be problematic as it would only mean that worker could not receive their pension. However, as we are using the levy system, failure to make contributions causes difficulty as the money is needed for the current generation of elderly. Payment of contributions must be made compulsory. The pensions for which payment of contributions is compulsory are called public pensions. Within public pensions are [1] the National Pension、and [2] the Welfare Pension. The first [1], the National Pension, covers self-employed workers and sole operators, who are known as Category 1 Insureds and must pay a fixed monthly contribution of \13,300. However, there is no penalty for non-payment in the law and no prescribed method for enforcing collection. Whether for this reason, the non-payment rate had risen to the height of 29.1% as at the end of fiscal 2001. Although membership of the National Pension system is, prima facie, mandatory, there are more than 1 million people who have not joined, a fact that seems ludicrous, yet is true. The Welfare Pension, [2], covers salaried employees, those who receive wages or remuneration from a company, who are known as Category 2 Insureds. As in this instance it is usual for the company to deduct contributions from wages these workers bear the burden of the pension whether they like it or not. The amount of the pension contributions made varies according to the amount of remuneration. This is known as the income-proportional system. As those with a duty to pay pension contributions pay a prescribed amount, which is then paid to those covered in that fiscal year, when some default the shortfall is made up for by those who fulfill their payment obligations. This means that contributions are taken from where they can be obtained. The Ministry of Health, Labor and Welfare makes the excuse that those Category 1 Insureds who default will not themselves receive the pension in their future old age. However, as the National Pension is a levy system, the contributions made go to support the previous generation in their old age and do not decide the future entitlements of the person making them

4.	What is the best pension system?
	(1) It is well know that the pension system depends on the people offering mutual aid to one another. On this basis one opinion is that tax revenue be used as a resource to make sure that all the people bear the burden of the pension or that the entire populace assists the elderly. An idea attracting attention within this view is the use of consumption tax for the pension, in other words the introduction of a specific purpose consumption tax. If all pension benefit payments were met by using consumption tax, the tax rate would be too high, so there is a proposal that an amount equivalent to that obtained through the current National Pension, an 'initial portion' be obtained through consumption tax. The 'supplementary portion' represented by the Welfare Pension would be converted to the 'savings method'. If this supplementary portion converted to the savings method were also preserved as a public pension then membership would be compulsory, however the possibility of making membership voluntary so that each worker can use private sector insurance companies to freely accumulate savings is also being investigated. However, as adoption of this method would move the pension outside the control of the Ministry of Health, Labor and Welfare, the current reforms are being advanced on the basis of mere system planning within the current method. (2) The lobby advocating the securing of resources from taxation in order to make burdens equitable is growing stronger. However, from the people's perspective, whether it is taxation or social insurance it is certainly a compulsory imposition. Yet even though the main point of the support differs from sickness, unemployment, livelihood protection and lifestyle in old age, it is certainly aid. Both taxation and social insurance share the characteristic of mutual support. They are substantially the same. Accordingly it gives the people greater ease of mind if their overall burden (rate of contribution), including taxation and social insurance, is decided by the state, with fixed rates imposed now and for the future. The pension system should be not quarantined from reform; reforms should be comprehensive, covering taxation (in particular consumption tax), health insurance, employment insurance and the public pensions. If this is to be done it is desirable that an overseeing body such as the Cabinet Office or the Council on Economic and Fiscal Policy should have the authority to draw up a proposal. The creation of new systems depends on comprehensive plans, not on the plans of individual ministries. Table: 4 broad pension system concepts - A practical comparison of Japan and Sweden Methods of Imposing Burden Methods of Determining Benefits I Benefits-based pension (Defined Benefits Pension) II Premiums-based pension (Defined Contributions Pension) A Levy Method IA Japan's public pensions IIA Sweden's fixed premium rates (16% from 18.5% of annual income) B Accumulation Method IB The substitution portion of Japan's Employee Pension Fund, Japan's National Pension Fund IIB Sweden's fixed premium rates (2.5% from 18.5% of annual income) IA FPayment of a fixed amount to the previous generation IIA:Payment of a fixed amount shared between the current generation IB:Contributions made according to overall affordability, payment to previous generation IIB:Payments shared between the current generation according to ability to make contributions (Materials created by author)

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