universal pension coverage – Japanese style

The Wikipedia entry for “National Pension (Japan)” reports that “in 1961 the National Pension Act created universal pension coverage for residents of Japan.[1]”

The footnote leads me to a useful 53-page explanation of Japan’s complex system of old age pensions, from which I learn that every older resident receives a basic pension, to which an earnings-related pension can be added.

One of the characteristics of Japan’s public pensions is that the system of “universal pension coverage” is adopted in which all people are covered by public pensions regardless of occupation, income or other factors. Such a system was established by the start of the national pension plan in 1961. ….

Subsequently, the basic pension plan was introduced by a plan amendment in 1986.

Now, as a result, all working generations are insured by the national pension, and receive the benefits of a basic pension with a fixed amount according to their participation period when they become old. In addition, employees in the private sector, government employees or others participate in employees’ pensions (mutual aid pensions), and receive an earnings-related pension, as a topping-up of the basic pension, according to their earnings and participation period in the past.

Pension Bureau, The Point of the Pension Plan (Ministry of Health, Labour and Welfare, 1 June 2010), p.8.

If Japan’s basic pension is universal, why do residents receive “a basic pension with a fixed amount according to their participation period when they become old”? Browsing the brochure, I discovered that coverage is universal only in the sense that contributions are mandated. Everyone from the age of 20 to 60, including the unemployed and self-employed, must contribute the same sum each month. In 2010, mandated contributions were set at ¥15,100 (US$180) a month. On reaching age 65, those with 480 months (40 years) of contributions become eligible for a full basic pension, equal – as of 2009 – to ¥66,008 (US$724) a month. Older residents with additional, or fewer, contributions receive a proportionately larger, or smaller, basic pension. Those with fewer than 25 full years of contributions are entitled to a lump sum payment based on the number of contributions, but no pension.

This is a flat contribution/flat benefit pension system. It is universal only in the sense that the same rules apply to everyone: with fewer contributions, the pension in smaller. With no, or too few, contributions, there is no pension.

But, if everyone is forced to contribute, isn’t this a universal scheme, at least in coverage? Perhaps. But what about those who live in poverty, and cannot afford to make the mandated contributions, or at least not enough contributions to qualify for a pension? Those with low incomes do qualify for means-tested exemptions of up to 100% of the required contribution. But, the exempted contributions count for only a portion of a fully-paid contribution: 1/2 in the case of 100% exemption, 5/8 for 75% exemption, 3/4 for 50% exemption and 7/8 for 25% exemption. Someone who is lifetime poor could end up with fewer than 25 years of contribution credits, with no entitlement to a pension. Or, more likely, the pension would be equal to something like 2/3 of a full basic pension, or US$480, well below any reasonable poverty line in Japan.

In brief, Japanese basic pensions do not provide universal coverage, because the poorest find it difficult to accumulate enough credits to qualify for a basic pension. Of those who do qualify, the reduction in the size of the pension for those with too short a record of contributions leaves msny in severe poverty.

My conclusion: Japan’s pension system is complex and inefficient. The country should consider funding a basic pension from general government revenue instead of mandated ‘contributions’. (These hidden head taxes could be replaced by normal, fairer taxes on income and consumption). And, the basic pension should be made universal – with tests only of age and residence. Earnings-related pensions and personal savings can top-up the flat, basic pension available to everyone from age 65.

One Response to “universal pension coverage – Japanese style”

  1. Dalmer Hoskins writes:

    Well, you stumbled on the opposition parties’ proposals for social security reform. The ruling party, LDP, has historically defended the muti-tiered system which is in place. Opposition parties tend to favor a general revenue-financed first pillar. Similar to the U.S. the reform debate in Japan is now decades old with little sign of any significant change.