Overview of Pension System in Japan

1. Social Security in Japan 10.20.2014 Overview of Pension System in Japan

2. The origin of public pension financed by social-insurance • In 1889 the first public pension financed by the social insurance system was introducedin Germany. • the Iron Chancellor Bismark • a carrot‐and‐stick policy • What is the Social Insurance?

3. What is the Social Insurance? • Insurance is a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. Examples include car insurance, health insurance, disability insurance, life insurance, and business insurance. • In one cooking school. A dish cost JPY 20,000 is broken every year. If no insurance exist , the cost JPY 20,000 own the dish breaker. The insurance fee is depend on the number of student; if the number of student is 100, JPY 200 per year is the fee of the dish broken insurance.This is the origin of property type insurance.

4. What is the Social Insurance? • 3elements is important for calculating the net premium; the loss of risk, the probability of risk, the number of persons shared the risk • Total insurance fee relies on the administration cost, advertising cost etc. • total premium = net premium + α

5. What is the Social Insurance? • Then the social insurance? • Social insurance is a system where workers, employers and the nation all contribute the premiums to support each other when they become injured or ill, lose their job or retire.

6. What is the Social Insurance? Premium Nation Worker Employee tax total premium = net premium + α(only administaration cost)

7. In the normal social insurance system • Income redistribution function effects both the contribution and the benefit. Looking at individual income tax in Japan, as in foreign countries, a system of progressive taxation has been adopted. • Income redistribution function is indispensable in the social insurance, and this is the base of using the tax which compensates the money for poor people.

8. Progressive taxation system in Japan Million yen effective tax rate the amount of taxes effective tax rate the amount of taxes(ten thousand yen) taxable income(ten thousand yen)

9. Why the rich pay more than the poor?

10. Two principles in the taxation Because equality. • the principle of ability to pay • As the progressive taxation, the rich pay more than the poor. • the benefit principle • When the user receives a service, the user pays  a prescribed money amount.

11. Mandate? • Most of all countries public pension are mandate. Why? • Adverse selection occurs in private sector. Asymmetry of information of life expectancy, short life people at their own thinking rush into the pension insurance, so the insurance companies continue to raise the price of pension insurance, then no one can buy the pension insurance for the high price. Soon,no insurance companies exist for selling the pension. That is, most of all countries public pension are mandate.

12. Funding • Fund • Pay as you go

13. Public Pension History in Japan

14. History of Japanese Public Pension • 1875.4.5 Imperial Army’s Pension • 1875.8.24 Imperial Navy’s Pension • 1884 Civil Service’s Pension • 1919 Governmental Works‘ Pension • 1923 Public Service Pension • 1939 The Mariners insurance • 1942 : The Workers Pension Insurance Law was enacted (Renamed in 1944 as the Employees’ Pension Insurance Law.) • 1943 Municipalities Workers’ Pension 1890 Soldier’s Pension

15. History of the Public Pension System and Its Major Revisions 1954 : The Employees’ Pension Insurance Law was entirely revised (Actual start of benefit payment for the elderly) • Introduction of a benefit payment system of “fixed rate part + remuneration-based proportional part” • Introduction of modified funding method 1961 : Implementation of the National Pension Scheme (Launch of “universal pension system”)

16. 1939 • The Mariners insurance, includes both health insurance part and pension insurance part was introduced in 1939. Most mariners work hard and dangerous, and government attached importance to the shipboard transportation for preparing to war. • It was the first public pension in Japan except for navy’s & army’s and civil service pension. • Why mariners is fast in private sector?

17. 1942(Beginning of Employee’s Pension Scheme) • Japan’s social security style public pension system was launched as the Employee’s PensionScheme (Employees’ Pension Insurance, etc.) for employees. • At first, only male blue color worker could be a insurer. In 1944 small reform made, female worker can become a insurer and white workers too.

18. Background • Typically, the coal mining labors' pension was intended to introduce. They are tend to be Pneumoconiosis and short life. The comprehensive scheme was necessary to cover the labours’ old time. • The reason of the EPI was born in wartime 1943 is to avoid rising the price and save the mobility of labour. Some say the EPI was introduced to procure the war expenditure, however it is not true. In the war time, the pension fund was too low to cover the war time expenditure(Takeo Hanazawa). • In the truth, the end justifies the means. In wartime, many policy with military section could easily pass in the Diet. Ministry of health and welfare bureaucrat used this point.

19. Benefit formula and funding • When the EPI was launched, the benefit formula was a single layer of earnings-related part pension. • In those days, average income were JPY100 (male) and JPY46 (female) and government aimed to full funding method, so pension fee rate is 11%(in 1944). The basement of wage rule is different, however, the EPI contribution rate is 17.12% in 2014. How high the rate 11% was in 1944. Why?

20. 1954 • First major revision occurred in 1954. The Employees’ Pension Insurance was restructured to a two-layer system, of a flat rate part (the first tier) and a earnings-related part(the second tier) and funding method changed to pay as you go system. Earnings Related Part Flat Rate Part

21. Why the EPI introduced a flat rate part as a first tier? • Before 1954, the EPI benefit only related the past wage. That is, the high incomes received the high amount of benefit. • 1954 reform eased the strong relations between the contribution and the benefit. If coming back to 1954, what kind of reform do you perform to increase the pension’s function for improving the redistribution effect? Quiz

22. 1961(Beginning of Self-employed Pension Scheme) • Establishment of National Pension Scheme • In 1961, the National Pension Scheme for self-employed workers and agriculture, forestry, and fishery-related workers was established. Due to the differences of work style and income between the insured people of these two systems, and also for other reasons, the insurance premium payment, benefit payment, and others are handled by each different method from that time onward. Dependent Spouses of the employee • Self-employed workers and • agriculture, forestry, and fishery- • related workers, etc. [Optional participation] National Pension System Non-participants

23. History of the Public Pension System and Its Major Revisions (Improvement of Schemes) • 1965: Improvement of benefit payment level, achievement of “10,000 yen pension,” and establishment of the Employees’ Pension Fund • 1969: Achievement of “20,000 yen pension” (Standard premium of Employees’ Pension: 20,000 yen, the National Pension System: 20,000 yen for married couples) • 1973: Introduction of Price Indexation System and reevaluation of salary (Achievement of “50,000 yen pension”)

24. 1974 • After the revision of 1974 • Mutual aid pension, etc. Earnings Related part Earnings Related part Flat Rate part at one’s choice

25. History of the Public Pension System and Its Major Revisions(The revision of 1985) • Establishment of nationally common Basic Pension system supported by citizens. • Adjustment of benefit payment to be made more appropriate (Payment unit and payment rate were decreased gradually, assuming the participation period would be extended to 40 years at the mature phase). • Enforced participation of dependant spouses (housewives) of businessmen to the National Pension Scheme (Establishment of No. 3 insured persons system), and by this, establishment of pension right for women.

26. (Cont.)The revision of 1985 • Improvement of disability pension (Insurance of Disability Basic Pension for persons who became disabled before 20 years old). • Expansion of the Employees’ Pension coverage for companies with less than five workers. • Raising of pensionable age of women for the Old-Age Employees’ Pension (From 55 years old to 60 years old by 2000).

27. History and structure of Japanese pension system Since June 1942 Since April 1961 Since April 1986 Payment Self employed persons Agricultural workers Private company employees Public servants Self employed persons Agricultural workers Private company employees Public servants Self employed persons Agricultural workers Private company employees Public servants FixedFixed + proportionalProportional Fixed + proportionalProportional FixedFixed + proportional － Employees’ pension insurance Public pension National Pension Employees’ pension Mutual aid pension Basic pension ＋ Employees’ pension、Mutual aid pension Fixed Proportional to salary Proportional to salary Premium 　 －　　　 Proportional to salaryNo coverage FixedProportional to salaryProportional to salary Reference: Transition of employees in each industry type

28. Three types of insured persons

29. History of the Public Pension System and Its Major Revisions (The revision of 1994) • Revision of the Old-Age Employees’ Pension for people in their early 60s (Raising of pensionable age for the fixed rate part gradually from 60 years old to 65 years old by 2013) • Improvement of Old-Age Pension for Active Workers (Change to a system in which total amount of wage and pension premium will increase as wage increases), Balance adjustment with unemployment insurance payment • Change of the reevaluation system of salary (Reevaluation corresponding to raising rate of disposable income after increases in tax and social insurance fee)

30. The schedule for raising pensionable ages is as follows. * For men, those who were born on April 1, 1941, or earlier Revisions in 1994 Until FY 2000 65 years old 60 years old Those who were born between April 2, 1941, and April 1, 1943 FY 2001 to FY 2003 61 years old 65 years old 60 years old Those who were born between April 2, 1943, and April 1, 1945 FY 2004 to FY 2006 62 years old 65 years old 60 years old Those who were born between April 2, 1945, and April 1, 1947 FY 2007 to FY 2009 65 years old 60 years old 63years old Those who were born between April 2, 1947, and April 1, 1949 FY 2010 to FY 2012 64 years old 65 years old 60 years old Those who were born between April 2, 1949, and April 1, 1953 FY 2013 65 years old 60 years old

31. (Cont.)The revision of 1994 • Improvement of the Survivors’ Pension (Corresponding to an increase of double-income households, it allowed the double-payment of 1/2 of each Old-Age Employees’ Pension to reflect wives’ premium on the pension benefits.) • Exemption from the Employees’ Pension Insurance premium (for the person in question) while on child-care leave. • Creation of the special premium (1%) based on bonus, etc. for the Employees’ Pension Insurance

32. History of the Public Pension System and Its Major Revisions (The revision of 1996) • Integration of three Mutual Aid Associations of the former public corporations (JR, JT, and NTT) into the Employees’ Pension Insurance

33. History of the Public Pension System and Its Major Revisions (The revision of 2000) • Raising of pensionable age for the remuneration-based proportional part of the Old-Age Employees’ Pension (Gradually from 60 years old to 65 years old by 2025) • Change of the premium revision system (Listed subscribers’ premium (65 years old and over) was revised as only by Price Indexation System) • Adjustment of benefit payment of the Employees’ Pension Insurance to be made more appropriate (Adjustment of 5% of the remuneration-based proportional part. Previous payment amount was guaranteed.) • Expansion of the Employees’ Pension Insurance coverage for the people in their late 60s (To expand to people under 70 years old. Establishment of the Old-Age Pension for Active Workers for workers of 65 to 69 years old.)

34. Revisions in 2000 Those who were born between April 2, 1953, and April 1, 1955 FY 2013 to FY 2015 61 years old 65 years old 60 years old Those who were born between April 2, 1955 and April 1, 1957 FY 2016 to FY 2018 62 years old 65 years old 60 years old Those who were born between April 2, 1957, and April 1, 1959 FY 2019 to FY 2021 65 years old 60 years old 63years old Those who were born between April 2, 1959, and April 1, 1961 FY 2022 to FY 2024 64 years old 65 years old 60 years old Persons who were born on April 2, 1961, or later From 2025 65 years old 60 years old For women, those who wereborn five years later than the above dates

35. (Cont.)The revision of 2000 • Introduction of full remuneration-based system (Same rate premium on bonus, etc. was imposed and reflected on the benefit payment. Special premium was abolished.) • Exemption from the Employees’ Pension Insurance premium (for the payment by business owner) while on child-care leave. • Enhancing the National Pension System by expansion of premium exemption, etc. (Establishment of the half premium exemption system, establishment of the exceptional payment system for students)

36. History of the Public Pension System and Its Major Revisions (The revision of 2001) • Consolidation of the Mutual Aid Associations of Agriculture, Forestry and Fishery Cooperative Employees into the Employees’ Pension Scheme

37. History of the Public Pension System and Its Major Revisions (The revision of 2004) • Main Revision is to change DC like plan from DB plan. (Employees’ Pension <EP>) raised by 0.354% per annum from October 2004 18.30% as fixed rate from FY 2017 on. (National Pension <NP>) raised by 280 yen (monthly amount) per annum from April 2005, 16,900 as fixed amount from FY 2017 on. • Budget is first, benefit is second. The benefit level will be automatically adjusted with the fixation of final EP premium rate at 18.30% Income substitution rate will be 50.2% in a standard model pension (including a couple’s basic pension) from 2023 on.

38. Framework of pension finance based on the pension system revision of 2004 • In the pension system revision of 2004, a new framework of pension finance was developed through a review of both the payment and coverage aspects, in order to establish a sustainable and secure pension system that can support the progressively lower birthrate and aging population in the future. • * Financial review is required by law every five years (next: 2009) (for developing a long-term financial forecast, and verifying the framework set in the 2004 revision). Framework of the revision in 2004 (1) Raising premium rates with a ceiling (2) Introducing an automatic adjustment system (in proportion to the macro economy) for the payment level within the range of coverage (3) Utilizing reserve fund (4) Increasing the government’s contribution rate for the basic pension to 50% • Fix the premium rates for FY2017 onwards (* the premium rates and their increasing process are provided by law): • Employees’ pension: 18.30% (shared equally by the employee and the employer) (raised by 0.354% annually, starting Oct. 2004) • National Pension: 16,900 yen (raised by 280 yen annually, starting Apr. 2005) (from the rate in 2004) • Reference: Present premium rates (as of June 2009): Employees’ pension: 15.35%, National Pension Plan: 14,660 yen Adjust the pension payment levels in line with the decrease in working generations. The standard pension payment level should exceed 50% of the average income of working salaried worker households at the point of payment start, regardless of the progressively lower birthrate. * Result of financial review in 2009 (published on Feb. 23): 62.3% (FY2009) → 50.1% (FY2038 onwards) Reference: Present pension payments (as of FY2009): Basic pension (after paying premium for 40 years): monthly payment: 66,008 yen; Employees’ pension (standard payment for a married couple): monthly payment: 232,592 yen Financial balance is to be established within approximately 100 years, after which the amount worth 12 months of premium is to be reserved, which should be utilized for payment to later generations. Following a fundamental tax system reform to ensure a stable resource for required funds, an increase in the contribution rate to 50% by 2009 is provided by law. In order to establish a sustainable pension system, all of Frames 1 to 4 must be put into operation. Increasing the government’s contribution rate to 50% is the final remaining challenge. 38

39. In case wages (prices) rose on some level Wages (prices) Indexation adjustment rate Wage (prices) increase rate Indexation adjustment rate ⇒Carry out the adjustment of indexation. Pension revision rate In case wages (prices) rose slightly Wage (prices) increase rate> Indexation adjustment rate ⇒Carry out the adjustment of indexation. (Pension revision rate does not become negative) Wages (prices) Adjustment width actually made Pension revision rate Indexation adjustment rate In case wages (prices) fell Pension revision rate Wages (prices) ⇒Carry out no indexation adjustment. Indexation adjustment rate

40. The revision of 2004 • Divorced women(2007～) • Single women(1961～) Period of the marriage former husband 1/2 Husband's life Wife’s life 1/2 former wife National Pension + Public Assistance

41. Current System

42. Current Structure of the Public Pension System (The figures are as of 31 March 2013.) Mutual Funds (0.44m) Employees’ Pension Insurance (34.51m) Basic Pension Category No.3 Insurer Spouses of employees (0.98m) Category No.1 Insurer Self-Employed etc. (19.00 m) Category No.2 Insurer Employees (38.92m)

43. Qualifications, Requirements The eligibility to receive pension benefit requires a minimum of 25 years of premium payment, and the maximum enrollment period is 40 years. Pensionable age: Basic pension - 65 years old Employees’ pension - 60 yrs. Old（Male 65 in 2025, Female 65 in 2030）

44. The benefit formula of the EPI (A) Flat Rate Portion = Basic Pension (B) Remuneration-related Portion (1) + (2) (1) a x 7.125 / 1000 x b (up to April 2003) x c (2) a’ x 5.481 / 1000 x b (after April 2003) x c a: Average Monthly Standard Salary（AMSS）; lifetime average income within 1% of bonus a’：Average Standard salary（ASS）;lifetime average income within 100% of bonus b: Service period(Number of insured months), c: Indexation Rate (C) Additional annual benefits It relates the age of spouse and the number of children.

45. The benefit formula of the NP Standard Formula Contribution Payment Exemption System introduced in 2009

46. Newly vulnerable persons emerging Contribution Payment Exemption System When NP Insured person’s income is too low to pay contributions or Insured persons have other reasons, Insured personscan apply for the exemption from contribution payments at Insured persons’ local Municipal Office. Then JPS Branch Office examines Insured persons’ previous year’s income and other circumstances. If Insured persons’ application is approved, exemption of full or partial amount of contribution payment is granted. Please refer to this chart for some exemption types, contribution amount to be paid, and the rate of Old-age Basic Pension amount with exemption compared with the amount without exemption periods.

47. JapanesePension System Indexation Rate The National Pension Plan (the Basic Pension) BP + Average Standard Salary 5.481 / 1000 Service Period Indexation Rate Average Standard Salary（ASS）;lifetime average income within 100% of bonus And additional annual benefitsis available. It relates the age of spouse and the number of children. The EPI benefit is JPY 1,063,474 - 2,508,954 annually, including the Basic Pension Employee’s Pension Insurance Mutual Aid Pension

48. Definition non-regular employee Common Public Conception. whole worker Non regular employee Pension = NP Health Insurance = NHI Permanent employee Pension = EPI Health insurance = UMHI or EHI

49. Composition on Life in Japanpermanent worker Entering in a company Retire Dead 18～22 year old 60～65 year old 79～86 year old Public Assistance Health Insurance (Union Managed or Employee’ Health Insurance) (National Insurance) Public Pension(Employee’s Pension Insurance) Long-Term Care Insurance Labour Insurance 1 Workers’ Accident Compensation the injury, disease, disorder and death resulting from on-the-job accidents 2 Employment Insurance loosing a job The red character shows the benefits in cash .

50. Composition on Life in Japannon-regular worker Entering in working Retire Dead 18～22 year old 60～65 year old 79～86 year old Public Assistance Health Insurance (National Insurance) Public Pension(National Pension) Long-Term Care Insurance Labour Insurance 1 Workers’ Accident Compensation the injury, disease, disorder and death resulting from on-the-job accidents 2 Employment Insurance loosing a job The red character shows the benefits in cash .