Social Security Around the World VII: Japan

Japan is an incredible success story.  After so much suffering in World War II, this country now has the second largest economy in the world and the longest life expectancy of any country in the OECD. This success however, may become a fiscal nightmare in the future. In 1998, 16.2% of the Japanese population was 65 or older (about the OECD average), but by 2050 this number will jump to 32.3%. Spending on public pensions accounted for 9.3% of GDP in 1997 and this number is only expected to increase. The 1994 Pension reform attempted to resolve some of the fiscal problems facing the nation. Benefits were to be reduced 5%, eligibility for KNH (see below) benefits was to increase from age 60 to 65, and wage indexation of benefits was to be terminated. Instituting American-style 401(k) programs have also been proposed.  

While these fiscal issues need to be resolved, longevity should be celebrated. Further, Japan has among the highest elderly labor force participation in the OECD. For those aged 60-64, 74.8% of men are working and 40.1% of women are working. Of all the public pension programs I have examined so far, the Japanese system seems to be the most sensible.

Kiso Nenkin

This is a basic flat rate pension give to all residents age 65 and up. There are no earnings tests or work history requirements needed to receive his benefit, but the pension is not large. Often, this is the only benefit housewives receive.

Kosei Nenkin Hoken (KNH – Private Employees Pension)

This program covers 85% of all workers; the rest are covered by Kyosai Kumiai (Public Employees Pension), but since the programs are very similar I will only discuss the KNH. The pension benefit is calculated as follows:

• Pension=(infl. adj. avg. wage)*(contribution years)*(0.0075)

This means a typical individual who worked 50 years will earn 30% of their career monthly earnings. Factoring in the Kiso Nenkin benefit of a husband and his wife, a typical couple will have a pension of about 50% of their annual wages. The program is financed through a payroll tax of 17.35% split evenly between the employer and the employee.

One can receive partial pension benefits beginning at age 60 through the Zaishoku program (see below), but full pension benefits do not occur until age 65. After age 65, one can delay pension benefit receipt with some actuarial adjustment.

Zaishoku Pension

The Zaishoku Pension is an earnings tested pension for employees aged 60-64 and is part of the KNH system. If one works between 60-64, an automatic 20% reduction in benefits occurs and other pension benefits are taxed away as earnings increase. Implicit tax rates are: 50% for earnings above ¥220,00 ($1,910) per month and 100% for earnings above ¥340,000 ($2900) per month.

Unemployment/Disability

Unemployment Insurance (UI) is limited to 300 days in Japan. Some people do use UI as a form of early retirement but since benefits are limited to a year, this has a moderate impact on the number of people who retire.

Unlike most European countries, very few Japanese use the Disability program as an interim income support. The rules to qualify for this program are strict and require full disability. Also, the benefits are similar to the KNH program so only the truly disabled generally apply.

Kosei Nenkin Kiken (KNK – Employee’s Pension Fund)

The employer-provided pension program covers about 2/3 of all workers. Workers can choose a lump sum payment or an annuity. Often, the KNK benefit is paid in conjunction with a mandatory retirement at age 60. Due to the seniority system, middle-aged workers are often expensive and firms use mandatory retirement to unload these workers; those who leave their job through mandatory retirement often find other part-time work, but finding full-time work in Japan for those over 60 is often difficult.