Japan's Pension System Faces Reform Amidst Aging Population and Declining Birthrate
The Japanese Ministry of Health, Labour and Welfare is preparing for a crucial reform of the public pension system, scheduled for next year. This comes as the nation grapples with a rapidly aging population and a declining birthrate, putting pressure on the system's sustainability.
On April 16th, a ministry council discussed various scenarios for a financial verification of the public pension system, conducted every five years. This verification, often referred to as a "health checkup" of the pension system, involves estimating future benefit and premium levels based on demographic and economic projections.
The previous review in 2019 predicted a significant decline in future benefit levels of the national pension, potentially by as much as 30%, due to the aging and shrinking population.
Council members are currently examining options to increase benefit levels and will announce the results of their estimates this summer. These results will be crucial for the upcoming pension system reform.
the national pension, covering all individuals between 20 and 59 years old, and the employees' pension, which is mandatory for company employees and public servants.
The 2019 review included an estimate for benefit levels based on a 45-year contribution period for the national pension. This showed a potential improvement of 6.8 points in the benefit level, or income replacement rate, for a model household consisting of a company employee and a spouse.
The income replacement rate represents the percentage of an individual's average after-tax income that they receive as pension benefits. For example, a 60% income replacement rate means that pensioners would receive benefits equivalent to 60% of the average after-tax income of the working-age population.
Currently, the employees' pension benefits are suspended if the wages of working individuals aged 65 or older exceed a certain level. This system has been criticized for discouraging elderly people from continuing to work. The ministry has proposed producing an estimate for cases where this system is reviewed or scrapped.
Other proposals include extending the employees' pension coverage to part-time workers who meet certain requirements and raising the ceiling of the standard monthly remuneration used to determine employees' pension premiums. Currently, company employees do not have to pay more premiums if their monthly salary exceeds 650,000 yen ($4,210).
The April 16th meeting also included discussions on future demographic and economic conditions, which will be used to study the fiscal outlook of the pension system.