Index / Back / Next

Chapter 1
Revising the Pension System towards the 21st Century

Section 1. Conditions Surrounding the Public Pension System and Need for Revisions

1. Conditions Surrounding the Public Pension System

(1) Current conditions of the public pension system

Since the establishment of universal pension in 1961, the public pension system in Japan have been revised for several times, and currently there are about 70 million of subscribers with about 26 million of beneficiaries. The total pension fund is reaching about \34 trillion. For average elderly-only households, public pension benefits consist of more than 60% of their income, and for about a half of the elderly-only households, public pension benefits are the only income. Thus the public pension system has plays an indispensable and significant role as major financial security in people's living in their old age.

The public pension system is operated under the responsibility of the national government. It is a life annuity that people can receive benefits throughout their lives no matter how many years they live. The amount of pension benefit is raised in accordance with the increase of commodity price to maintain the actual value of the benefit so that the beneficiaries can secure the necessary fund for their living. Personal savings and insurance cannot guarantee the security for the price increase, and the public pension system serves as a system for "Secure feeling" to support the life after retirement.

The public pension system can ensure life-long benefit is because it employs so-called "intergenerational support" mechanism in which everybody in working generation subscribes the pension system to form stable insurance and required funds for paying the pension benefits for the elderly are borne by younger generations. In addition, the system has been revised at least in every five years to take necessary measures in response to the conditions with aging population and to maintain an impartial and fair system.

However, recently the environment surrounding the public pension system is changing at a much faster speed than expected, and its impact on the pension system is becoming very serious.

(2) Advancement of aging society with fewer children

Japan has been growing as an aging society with fewer children at a fast speed that we have never seen in other developed nations. Regarding the issue on having fewer children, the total fertility rate recorded the lowest of 1.39 in 1997 due to late marriage plus other reasons. This rate is much lower than the level required to maintain the population, which is 2.08, and the number of new born babies also marked the lowest in the post-war history, about 1.2 million. As for aging population, according to the "Population Projection for Japan (medium variant)" published by the National Institute for Social Development and Population Problems, MHW, in January 1997, the population ratio of age 65+ is projected to increase from 14.6% in 1995 to 32.3% in 2050. Currently every four persons of working generation are supporting one elderly person, but in the future every 1.5 persons will be supporting one elderly person. The public pension system operates on the basic mechanism of "intergenerational support" in which the current working generation with salaried workers and self-employed people are supporting the elderly people receiving pension benefits. The change in the ratio of the elderly people and working generation supporting the elderly as a result of the advancement of aging society with fewer children will affect the system significantly.

(3) Changes in economic trend

In the recent economic conditions, the increase rate of commodity price is staying at a low level, and the increase rates of wage and economic growth are also staying at low standard. With the advancement of aging society with fewer children, decrease of economic growth rate and slow increase of income for working generation are projected, and it is pointed out that younger generation's ability to bear social security burden will reach its limit. In addition, while the condition of world economy is becoming severer (globalization), companies are expressing that the burden of pension insurance contribution is becoming heavy. Now we must seriously examine the level of burden that the future working generations and business owners can and would agree to bear.

2. Need for Revising the Pension System

The latest revision made to the pension system was in 1994. After that in January 1997, the new population projection came out and indicated that with the advancement of aging society with fewer children the premium for the Employees' Pension in the future (2025) could reach about 35%, which is about double amount of the current premium if the contents of the pension benefits would stay the same as those of the current system. For the National Pension, the premium is projected to increase to \26,000. Such burden would be too heavy on the future working generations and companies. As the public pension system in Japan is designed to maintain the balance between income and expenditure for a long time using the step-wise increase of premium, if there is no increase of premium, the pension fund could cover only 60% of required spending on the benefits in the future. In order to realize long-living society with active elderly people in the 21st Century, it is necessary to maintain impartiality within and between generations, to ensure the benefits in the future, and not to impose excessive burden on future generations. As this is the year for once-in-five-year review of the system, it is important to present the future vision of the public pension by reviewing the entire system and to gain citizen's trust in the public pensions by stabilizing the post-retirement life.

Index / Back / Next