Japan's Pension System Faces Reform Amidst Aging Population and Falling 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 system, involves estimating future benefit and premium levels based on demographic and economic projections.
The previous review in 2019 projected a significant decline in future benefit levels of the national pension, potentially reaching 30% as the population ages and shrinks. In response, council members are exploring options to increase benefit levels and will announce the results of their estimates this summer, which will inform the pension system reform next year.
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 in addition to the national pension.
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 the average after-tax income of the working-age population that pensioners are entitled to receive.
Currently, the employees' pension system suspends benefit payments if the wages of working individuals aged 65 or older exceed a certain level. This has been criticized for discouraging elderly people from continuing to work. The ministry is considering producing an estimate for scenarios where this system is either revised or scrapped altogether.
Other proposals include extending the employees' pension coverage to part-time workers who meet specific requirements and raising the ceiling of the standard monthly remuneration used to determine employees' pension premiums. Currently, company employees do not have to pay additional premiums if their monthly salary exceeds 650,000 yen ($4,210).
The April 16th meeting also involved discussions on future demographic and economic conditions, which will be used to study the fiscal outlook of the pension system. These discussions are crucial for ensuring the long-term sustainability of the system in the face of Japan's changing demographics.