Pension System in Japan: Issues for Reform
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ISSN 1392–6195 (print) ISSN 2029–2058 (online) JURISPRUDENCIJA JURISPRUDENCE 2012, 19(1), p. 269–292. PENSION SYSTEM IN JAPAN: ISSUES FOR REFORM Audrius Bitinas Mykolas Romeris University, Faculty of Law, Department of Labour Law and Social Security Ateities 20, LT-08303 Vilnius, Lithuania Telephone (+370 5) 271 4633 E-mail: [email protected] Received on 14 February, 2012; accepted on 5 March, 2012 Abstract. The aim of this article is to define the actual construction of the Japanese pension system influenced by the economic and social challenges and implemented pension system reforms. In this article, the development of Japanese pension system reforms is analysed, as well as legal, economic, social environment is identified. Until recently, it was a common perception that Japan has managed economic success without worsening the income inequality and pension benefits, but since the economic recession in the 1990, the Japanese pension system faces a new challenge. Moreover, the Japanese population is ageing rapidly (low birth rate, long life expectancy), therefore, ageing influences the entire society and requires more complex and pressing pension system reforms. Analysis of scientific literature, legal acts, documents, historical methods was used. It may be used as methodical literature studying the actual processes in the field of the pension system reforms in Asian countries. Keywords: pension system, reform, crisis, ageing, Japan. Jurisprudencija/Jurisprudence ISSN 1392–6195 (print), ISSN 2029–2058 (online) Mykolo Romerio universitetas, 2012 http://www.mruni.eu/lt/mokslo_darbai/jurisprudencija/ Mykolas Romeris University, 2012 http://www.mruni.eu/en/mokslo_darbai/jurisprudencija/ 270 Audrius Bitinas. Pension System in Japan: Issues for Reform Introduction The exclusivity of the Asia-Pacific region hides the fact that in this region the world’s largest population is concentrated, the rapid increase of older population growth is expected, life expectancy is increasing, but the fertility rate is decreasing. Ageing in this region will be at its most rapid between 2010 and 2030. Given the long lag in pension-policy planning, there is now a narrow window for many Asian economies to avoid future pension problems.1 Japan is also confronting with the global economic downturn, but the Japanese pension system, however, can be identified as a welfare state pension system (in comparison to other Asian countries). Design of the pension systems in Asia and the Pacific region is sufficiently heterogeneous: pension systems in Japan and South Korea are the closest to the continental European model (with some elements of the Southern European model) or to the liberal model (the first pillar - universal pension), pension schemes in Hong Kong - a classic three-pillar pension system (first pillar - the pay-as-you-go social security pension; the second pillar - occupational pensions system; the third pillar - voluntary pension savings), in Taiwan - defined contribution compulsory occupational pension scheme; in Singapore and Malaysia - a compulsory savings system in the provident funds, the essential element of pension organisation in Chinese People’s Republic is state social insurance pensions, in Australia and New Zealand we could identify the liberal model (with a certain exclusivity). However, this region is different with regard to the level of economic development: in industrial countries (Japan, S. Korea, Australia, New Zealand) pension coverage and benefits are higher, other countries (India, Pakistan, Sri Lanka) are characterised by high unemployment and relatively low pension coverage. New economic and social trends encourage the countries of this region to reform their pension systems. The World Bank report on the Asia-Pacific pension systems indicates the need to reform pension systems in order to avoid European mistakes: it is necessary to expand the scope of the system, to reduce an early retirement, to promote savings in private funds (which is actually not sufficient) and to index pensions by life expectancy formula.2 Pacific Economic Council notes the following Asian countries’ pension system policy trends: a population ageing, expansion of atypical employment relationships, the need for the pension accumulation system, increasing of pension coverage, growing industrialisation and urbanisation (it requires extra income for persons living, higher costs for health care and pension income) and increasing demand for cross-border social security agreements (because of the migration of workers).3 International Social Security Association emphasises that people use early retirement pension schemes, the Asian and Pacific countries pension coverage is relatively low, and the actual pension amount is not index-linked according to the standard of living.4 1 OECD. Pensions at a glance: Asia/Pacific. OECD publishing, 2012. 2 World Bank. Pensions ir Asia/Pacific, January 2011. 3 Pacific Economic Council. Towards a more resilient society: lessons from economic crisis (report of the social resilience project). Tokyo: Japanese Institute of International Affairs, 2010, p. 41−42. 4 Asher, M. Extending social security coverage in Asia-Pacific: a review of good practises and lessons learnt. International Social Security Association working paper No. 6. Geneva: ISSA, 2009. Jurisprudence. 2012, 19(1): 269–292. 271 Thus, the international organisations identified the essential social security reform strategies in the Asian region: to prolong the active working life, to ensure the security of personal income from inflation, to review models of income redistribution, to ensure protection against poverty, to ensure the financial sustainability of pension systems and to ensure labour market efficiency. Financial sustainability and growth of the public debt is a problem not only in the Asian region but also in Europe or in USA. In particular, we could note a significant public sector debt in Japan: according to the OECD (Organisation for Economic Cooperation and Development) data, the public sector debt in Japan reached 198 percent of GDP (in 2010), which was much more than the USA (93 percent of GDP), United Kingdom (81 percent of GDP), France (92 percent of GDP) and more than in Greece (129 percent of GDP). Japan’s debt started increasing since 1990 because of the reduction in asset prices. Despite government efforts to achieve the fiscal consolidation, the level of debt did not decrease, but also significantly increased.5 Until recently, it was a common perception that Japan has managed economic success without worsening the income inequality and that Japan‘s poverty rate is one of the lowest among the developed nations, but since the economic recession in the 1990, there has been a fierce debate on whether or not Japan‘s so-called equality is a myth.6 The need to strengthen the pension system and seeking for the financial sources in Japan is related to the other global world economic crisis (Asian financial crisis in 1997– 1998 and world economic crisis in 2008), as well as the spread of atypical employment relationships, the growth of self-employment, the increasing of the migration of workers, the need to strengthen pension system management, low incentives to participate in the private voluntary pension accumulation funds and mistrust of people in pension system. The Japanese population is ageing rapidly (low birth rate in the 1990, long life expectancy). Ageing influences society and requires more difficult and more pressing reforms of the pension system in Japan. Of course, the Japanese government is looking for new ways to stop pension system deficit growth, not only by reducing benefits or increasing contributions, but trying to change other pension system parameters. For example, in 2004 a modified indexation (automatic change in the pension amount, depending on the demographic processes) has been introduced, the minimum pension has been established, the retirement age has been extended and so on. Social and economic changes in Japan require not only a comprehensive pension system reform, but reforms in other related areas (fiscal policy, labour market, management and capital markets). 1. Economic and Social Assumptions for the Pension Reform Analysis of recent pension reforms shows that today pension systems are more vulnerable to the economic shocks and shifted part of financial and economic risks on 5 Oshio, T.; Oishi, A. S.; Shimizutani, S. Social security reforms and labour force participation of the elderly in Japan. The Japanese Economic Review. 2011, 62(2): 249−271. 6 Abe, A. K. Low-income people in social security systems in Japan. The Japanese Journal of Social Security Policy. 2003, 2(2): 59−70. 272 Audrius Bitinas. Pension System in Japan: Issues for Reform individuals. However, we should emphasize that over recent decades most of the reform debates were implicitly analysed on the basis of the perceived or real need for financial stabilisation and not on social stabilisation. Social stabilisation implies that pension levels are not allowed to fall below a certain minimum benchmark—for example article 65 (1) of International Labour Organisation Convention 102 requires a pension to be at 40 percent of the total of the previous earnings of the beneficiary after 30 years of service. Social expenditure for pensions in Japan is rising: in 1970 it was only 1.1 percent of GDP, but in 1990 it was already 5.3 percent of GDP and in 2005 it was 9.2 percent of GDP. Forecast show the same trend for pension expenditure: in 2015 the level of pension expenditure will amount to 9.5 percent of GDP. After implementing reforms (raising the retirement age, raising the level of contributions, decreasing the level of pension benefits), in 2025 the level of pension spending will decrease by 8.3 percent of GDP. In 2006, the level of tax (personal income, corporate income, consumption, property) and the level of social insurance contributions in Japan was the smallest (27.9 percent of GDP), compared to France (44.2%), Germany (35.6%), Sweden (49.1%), United Kingdom (37.1%) and USA (28%).7 Change of pension expenditure (period 1990-2007) in Japan was 80.5 percent. We could note that an average of countries of OECD was only 14.5%.