Section 2. 1999 Amendment to the Public Pension

(1) Compiling opinions at the National Pension Council

Formal discussions on the revision of actuarial revaluation for 1999 began in the first meeting of the National Pension Council held in May 1997. The National Pension Council is an advisory council to the Minister of Health and Welfare, consisting of learned people from universities, economic organizations, labor organizations, etc., and the council reviewed the entire pension system.

Recently, people have been expressing their concerns about the public pension system; whether they can receive pension benefits as they were promised; whether their pension benefits would be adequate for the premium they paid, etc. In order to maintain a stable pension system in which people can feel secure and trusted for a long time, it is necessary to disclose information on pensions and to examine the system with the awareness of national opinions. The National Pension Council disclosed the documents and meeting minutes for each session, and after the first round of the deliberations it published the "Discussion Summary" in December 1997 based on previous discussions. On the same day, the Ministry of Health and Welfare presented the "five alternatives" for the revision of the pension system together with key methods for balancing the benefit and burden, and their impact on premium amount using the estimated calculation results. Including the minutes of the council meetings, these information was published through the Internet, and further efforts have been made to disclose a wide range of information and to gain public support. Such efforts include the public hearings, implementation of the "Survey to the learned", publishing the "White Paper on Pensions" in which the mechanism and the current conditions of the pension system are explained for easy understanding.

Since then, the National Pension Council held 31 sessions of discussions, and formulated a report on October 9, 1998. The report indicated the basic concept for the next revision, and pointed out that the total expenditure on benefits must be suppressed in order to prevent excessive burden on future generations, but the current amount of pension benefits should not be reduced, and the distribution of pension benefits should be guaranteed in the future. Regarding the possibility of shifting the financing method of the Employees' Pension to the funding method, the report recommended to maintain the current method which has the features of both funding method and pay-as-you-go method. Changing the method would cause huge so-called "Double Burden" during the transition period and it would be difficult to resolve the problem. Furthermore, it would be difficult to respond to the event of unexpectedly large inflation. Regarding the privatization of the Employees' Pension, the report confirms that the current system should be maintained because of the potential problems for salaried workers in small and medium size companies to end up receiving only the basic pension as the only financial security in their old age. For specific individual issues, the report provided recommendations to a wide range of topics to cover the entire system. Some of those topics covered were: standard of benefits and state subsidy for the basic pension; standard of benefits and burden of the Employees' Pension Insurance; changing the indexation system after determining the amount of pension benefits; introducing the old-age pension for active workers in their late 60s; increasing the pensionable age for the remuneration-based portion (partial pension); step-wide increase of pension premium; introducing the total compensation system to include bonus in the calculation of premiums and benefits; setting up meetings to discuss the concept of pensions for women including the adoption of single person as a unit in the pension system, No. 3 insured person system, survivors' pension, and handling of the case with divorced, etc.; measures in the pension system for the issue of having fewer children; treatment of the burden of the National Pension premium for students; the concept of the Employees' Pension Fund; the concept of self-management of the new pension reserve fund, etc.

(2) Public announcement of the bill of the Amendment to the Pension System

On October 28, 1998, the Ministry of Health and Welfare made a public announcement of the bill of the amendment to the Pension System (proposal by the Ministry of Health and Welfare). The proposal of the Ministry of Health and Welfare was formulated by presenting specific contents of the revision recommended in the report of the National Pension Council, and it was to widely contribute to national discussions and presented three approaches to benefit and burden in the future. The basic approach presented in the proposal by the Ministry of Health and Welfare is to maintain the current two-tier framework of the public pension system, but to set the maximum pension premium to approximately 20% of annual income (about 26% of monthly income) with consideration of long-term increase of the total national burden including the medical care and long-term care, and to suppress the growth of the expenditure on pension benefits in the future based on the maximum premium. In the three approaches the following ideas are presented as ways to suppress the increase of expenditures on benefits: to adjust the standard of benefits, to increase the pensionable age for the remuneration-based portion of the Employees' Pension, to stop wage-indexation after determining the pension benefit, to introduce the old-age pension for active workers in their late 60s, etc. It states that when suppressing the growth of expenditure on benefits, 1 the amount of current and future pension benefit should not decrease from the current value; 2 increase of pension benefits should be guaranteed in case when commodity price increases (price indexation), and 3 the system should be revised gradually to avoid rapid and drastic changes.

Regarding the pension reserve fund, the bill includes the construction of the mechanism for new operation through the market and by implementing in the timing of radical reform of fiscal investment and loan programs. For other items discussed in the National Pension Council, the bill recommends that the increase of the ratio of state subsidy for the basic pension should be further studied along with the security of fund source with consideration of future financial conditions. Considering the current fiscal and economic conditions of Japan, it is difficult to increase the ratio of state subsidy at the current revision of the system.

(3) Submission of the bill of Amendment to the Diet

The Commission on the Annuities System of the Liberal Democratic Party had started the discussions for this revision in April 1997, and it examined the details of basic directions and key issues of the revision based on the proposal by the Ministry of Health and Welfare. The discussion was focused on state subsidy in the basic pension scheme and on the plan for increasing the pension premium in the near future. To summarize the key discussion issues, the Commission presented the chairman's proposal in December 1998.

According to this proposal, state subsidy for the basic pension scheme will be increased from the current ratio of 1/3 to 1/2 after securing stable fund source by year 2004. In order to increase the ratio of state subsidy from 1/3 to 1/2, it will be necessary to secure \2.7 trillion of fund in fiscal 2004 (based on the matured year) and \3.7 trillion in fiscal 2025 (both are based on the value of fiscal 1999) to cover the total increase of the basic pension.

Increase of premiums (rate) for the Employees' Pension and the National Pension scheduled for 1999 was postponed with consideration of the current social and economic conditions. Other contents were similar to the first approach in the three approaches presented by the Ministry of Health and Welfare.

At the formulation of 1999 budget, the amount of benefits from the Employees' Pension and the basic pension will be revised in fiscal 1999 according to price indexation, and the premium rates for the Employees' Pension and the National Pension will remain the same. The revision of the entire system should be further discussed.

In response to these activities and proposals, the Ministry of Health and Welfare submitted a bill to the Diet in February 1999 to freeze the premium increase for the National Pension in April 1999, and it was voted into law in March 1999. As for the bill to amend the entire system, the Ministry submitted a bill of Amendment to the Diet in July, after compiling the details of the revision as the "Outline of the Bill of Amendment to the Pension System" in March, consulting with the National Pension Council and the Advisory Council on Social Security, and then consulting with the Liberal Democratic Party and the Liberal Party.

2. Overview of the Bill of 1999 Amendment to the Pension System

The bill of Amendment to the Pension System submitted to the Diet in July 1999 is based on the framework of the current public pension system with two tiers, and it is to maintain the stable system for a long time by ensuring reliable benefit with feasible burden maintained in the future. Regarding the burden of pension premium, about 20% of annual income (about 26% of monthly income) is considered the maximum with consideration of the increase of total national burden in a long time including the medical care and long-term care. For the near future, the premium (rate) increase will be frozen because of the current social and economic conditions. On the other hand, the total expenditure on pension benefits will be adjusted in the future to fit within the range of available fund from contributions, and simultaneously the current benefit amount is guaranteed without reduction while the adjustment with price indexation is also granted.

Based on the principle of benefit and burden as described above, the following changes are included in the plan.

Figure 1-2-1. Basic Concept of the Amendment to the Pension System

(1) The National Pension System and the Employees' Pension System

1 Revising the pension benefit

a. Amount of the National Pension benefit

Starting in April 2000, the amount of the basic pension will be revised from \780,000 (\65,000 monthly. FY1994 value) to \804,200 (\67,017 monthly. FY1999 value), and the benefits of the following pensions will be also revised in accordance with the basic pension: the additional amount for child (children) to the Disability Basic Pension, the amount of the National Pension stipulated in the former law, such as the contribution pension and the Old-Age Welfare Pension.

b. Amount of the Employees' Pension benefit

Starting in April 2000, the multiplying factor to be used for the calculation of the amount such as Old-Age Employees' Pension (remuneration-based portion) will be changed from 7.5/1000 to 7.125/1000, and 5% of adjustment will be made to the standard of benefit. At that time, the previous benefit amount with price indexation will be guaranteed as an interim measure. The additional benefit for the spouse of beneficiary of the Old-Age Employees' Pension, the minimum guaranteed amount of disability pension for Class-3, and the amount of fixed value portion will be revised in accordance with the revision of the basic pension.

2 Changes in the revising method for amounts of the basic pension and the Employees' Pension after determining the initial amounts

Starting in April 2000, the amount of the basic pension and the Employees' Pension for the beneficiaries of age 65+ will be revised solely on the basis of price increase ratio, and other indices such as salary indexation will not be applied. The salary indexation and other indices will be applied to disability pensions until age 65. However, wage indexation will be used as necessary to avoid creating a large gap between the pension amount based on the price indexation and based on the wage indexation after age 65.

3 Increase of the pensionable age for the Old-Age Employees' Pension (remuneration-based portion) for the people in their early 60s

The pensionable age for the Old-Age Employees' Pension (remuneration-based portion) for the people in their early 60s will be raised to age 65 during the fiscal year of 2013 to 2025 for men and 2018 to 2030 for women, by changing one pensionable age in every three years. Along with this change, an early benefit system for the Old-Age Employees' Pension (remuneration-based portion) will be established based on the new reduction rate. The pensionable age for the fixed portion of the Old-Age Employees' Pension provided in early 60s to the people with disabilities and to retired long-term subscribers will be raised in accordance with the remuneration-based portion. The pensionable age for seamen and miners with 15 years or longer subscription period will be raised to age 65 by changing one pensionable age every three years during 2018 to 2030.

4 Introducing the Old-Age Pension for Active Workers in their late 60s

The employees of age 65 to under 70 in applicable work place will be considered as insured of the Employee's Pension and they will be required to bear the burden of premium, and an adjusted mechanism (Old-Age Pension for Active Workers) will be introduced in accordance with the standard monthly remuneration for the Old-Age Employees' Pension (remuneration-based portion) for these people. More specifically, the full amount of pension benefit is granted until the sum of the standard remuneration and the Old-Age Employees' Pension (remuneration-based portion) reaches \370,000 per month (the sum of basic pension for a wife and a husband will be \504,000), and when this amount is exceeded, a portion of pension benefit will be stopped at the ratio of two increase of standard monthly remuneration amount vs. one stopped benefit amount. The Old-Age Basic Pension will be granted at the full amount. With the introduction of the Old-Age Pension for Active Workers for the people in their late 60s, the delayed start of the Old-Age Employees' Pension will be abolished. This system to stop granting the benefit will not be applied to the people who reached age 65 prior to April 2002.

5 Introducing a half premium exemption system to the National Pension

In April 2002, a system to waive a half of premium payment (a half exemption system) of the National Pension will be introduced to primary insured with a certain level of low income, and the exemption will be applied upon request. This system will not be applicable to students who are eligible for the student exemption for the premium payment. In the calculation of the benefit for the Old-Age Basic Pension, the period with the half premium exemption will be evaluated as 2/3 of the normal subscription period.

6 Exemption of the National Pension premium payment for students

Starting in April 2000, primary insured of the National Pension who are students and have less than a certain amount of income will be exempted from the premium payment upon their application. The contribution for the period with student exemption can be made up during the subsequent 10 years, and when the premium payment is not made up later, the exempted period will not be included in the calculation for the Old-Age Basic Pension, but those years will be included in the calculation of the eligible period for receiving the benefits. When students become disabled during the student exemption period due to an accident, a full amount of Disability Basic Pension will be granted according to the level of disability.

7 Exemption of the Employees' Pension Insurance premium for the employers during the employees' child care leave

Currently the payment of the Employees' Pension Insurance premium during the period of child care leave is exempted for the insured portion only, and starting in April 2000 the employer's portion will be also exempted.

8 Burden of expenditures

a. State subsidy

The positioning of the basic pension will be reviewed thoroughly including the financing method, and the ratio of state subsidy will be increased to 1/2 by securing stable fund source by 2004.

b. Burden of the National Pension

The current premium of \13,300 will remain the same at this round of revision.

c. Burden of the Employees' Pension Insurance

The current premium rate of 173.5/1000 (191.5/1000 for seamen and miners) will remain the same at this round of revision.

d. The timing of raising the ratio of state subsidy and releasing the premium freeze should be synchronized and should be implemented at the earliest possible.

9 Revising the maximum and minimum of the standard remuneration

Starting in October 2000, the level of standard remuneration will be revised from the current 30 levels with the range of \92,000 to \590,000 to 30 levels with the range of \98,000 to \620,000.

10 Introducing the total remuneration system

Starting in April 2003, the Employees' Pension Insurance system will introduce a system to include bonuses in the premium calculation and to reflect the contribution in the calculation of the benefit (total remuneration system). At that time, the premium rate will be reduced from 17.35% to 13.58% and the multiplying factor for the benefit will be reduced from 7.125/1000 to 5.481/1000, so that the total contribution amount and the total benefit amount will not change with the introduction of the total remuneration system. However, a maximum amount (\1.5 million) will be set for bonus amount to be considered for premium.

In the calculation of the pension benefit, the current calculation method will be applied for the subscription period prior to the introduction of the total remuneration system, and the new multiplying factor for the benefit calculation will be applied based on the amount of standard monthly remuneration and the bonus amount for premium calculation for the subscription period after the introduction of the new system.

1 Freezing the exemption premium rate, etc.

Business owners with established employees' pension fund (EPF) make contributions to EPF for the portion that the EPF pays to the central government for the required premium for the Employees' Pension insurance (exemption premium). In the current revision, the premium for the Employees' Pension will remain the same and the exempted premium rate will stay the same. The required capital for the substitute payment (minimum liability reserve) will stay unchanged as the waived premium rate is frozen.

2 Deregulation

Considering the recent difficult conditions for fund management, the regulations for fund management will be eased by eliminating the regulation on asset size for the internal investment management (currently, the capital size regulation for \50 billion +) and by taking measures to expand the subjects for fund management including investment trust, stock index management, etc. in addition to currently used bonds. For trust contracts, the restriction on cash trust will be removed, and asset transfer by the actual certificates will be permitted when changing the management trust companies. In addition, based on the idea of easing the regulation on business operation of employees' pension funds, the requirement for mandatory supervision of an expert will be abolished and the regulation on business contractors will be changed from obtaining the approval of the Minister of Health and Welfare to submitting a notice.

3 Other

Previously the premium for employees' pension funds had to be paid in cash, but based on the concept that facilitating an easy payment mechanism for business owners would lead to fast resolution of insufficient funding at the EPF, it will be permitted to use listed stocks for contribution by satisfying a certain condition.

(3) Self-management of the pension reserve fund

The pension reserve fund is reaching about \134 trillion at the end of fiscal 1997. While aging society with fewer children advances, one of the issues with the pension reserve fund is the efficient management to reduce the increase rate of premium payment in the future and to ensure long-term stability of the pension system. This is increasingly becoming an important issue. In the current system, the total amount of pension reserve fund is saved in the Trust Fund Bureau in the Ministry of Finance, but in September 1997 the Council on Pension Self-Management (Chairman: Junichi Miyake, Vice-chairman of the Board, the Japan Research Institute, Ltd.) compiled a report of its discussions on the management of the pension reserve fund, and recommended that the management system should be amended to a system in which the Minister of Health and Welfare, the insurer of the pension system, would manage the fund in the most appropriate method for the benefit of the contributors of insurance premium. In the Basic Law on the Administrative Reform of the Central Government established in June 1998, the abolition of the depository of pension reserve fund is stipulated, and the report of the National Pension Council also recommended to abolish the depository requirement for the pension reserve fund and to construct a mechanism for self-management.

Upon these recommendations, the basic direction of the Minister for Health and Welfare to manage the pension reserve fund was decided for the current revision, and the following actions are also decided in relation to this decision: to utilize private-sector financial institutions for the operations in the market; to establish the "Pension Fund Management Fund" as the institution to manage the pension reserve fund; and to construct a new mechanism for pension reserve fund management. The timing of the implementation will be synchronized with radical reform of the fiscal investments and loan programs. The management of the pension reserve fund influences the level of insurance premium in the future and directly affects the benefit and loss of the premium payers. Considering these factors, the fund should be utilized efficiently with the basic principle of safe and reliable, and the representatives of the premium contributors shall be included in the members to formulate the basic directions for the fund management and to monitor the operation status so that their opinions will be reflected in activities. For self-management, a transparent mechanism shall be created with a clear responsibility scheme for the operation members and complete information disclosure system.

Upon the commencement of self-management, the Pension Welfare Service Public Corporation will be dissolved, and the facility services and loan services provided by the corporation will be withdrawn by taking adequate interim measures. Specifically, large-scale pension resort business (Green-pia) will be transferred to local municipalities through some measures for smooth withdrawal such as discount programs, and conditions of local municipalities and employment status will be fully considered. For housing loans and education fund services, a new loan system will be offered by the Pension Fund Management Fund through necessary interim measures, and the loan programs for the pensioners and for the development of hospitals and care homes for the elderly will be implemented by the Social Welfare and Medical Service Corporation.