Vol.34-No.03 March 1,1995
Professor of Labour Law
University of Tokyo
The proportion of elderly people over 65 in the nation's overall population is rising more rapidly than in Western industrialized countries (See Graph 1). The result has been that the ratio of pensioners to the insured is increasing under the Employees' Pension Plan for workers in the private sector (See Graph 2). The Employees' Pension Plan was originally inaugurated as an accumulation type system. This enabled the government to amass huge pension revenues. But it is now operated under an assessment system. Therefore, the relative increase in the number of pensioners resulting from the ongoing greying of society is putting a financial strain on the Employees' Pension Plan. According to Ministry of Health and Welfare calculations, it is predicted that if the age at which people will receive the annuity in full (currently 60 years) and the level of pension benefits remains unchanged, the premium rate will jump to 34.8 percent in 2025 when the proportion of the erderly in the overall population will peak. As one measure to prevent a surge in the premium indicated by the estimates, the Ministry of Heatlth and Welfare proposed that the pensionable age be raised from 60 to 65. The proposal was part of the 1989 Pension Reform Bill but was cancelled in the process of the Diet deliberations. At that time, however, the provisions for reviewing the pensionable age in the next calculations of pension financing were inserted in the supplementary provision of the Employees' Pension Law (Article 16-2). The government re-calculates pension financing once every five years, with 1994 being last year for this. Thus, through the debate at the Pension Council and in the ruling party, the proposed raising of the pensionable age was incorporated into the Pension System Reform Bill. The Bill was passed in the recent Diet session and became law, thus finally raising the pension age to 65 [Law for Revising a Portion of the National Pension Plan, (1994 Law No. 95)]
The most important revision of the new Law is raising of the pensionable age. However, the new Law incorporates other significant revisions regarding the Employees' Pension Plan and the National Pension Plan. I will first examine raising of the age at which one starts receiving the annuity in full. In relation to the matter, to promote employment of those in their early 60s, the government also revised in 1994 the Employment Insurance Law [in accordance with the Law for Revising a Portion of the Employment Insurance Law (1994 Law No. 57)] and the Law Concerning the Stabilization of Employment of older Workers, (1994 Law No. 34).
II. Raising the Age at Which the Pension is Drawn
Raising the age at which people will be eligible to draw employees' pensions in full from the present 60 to 65 is, an inevitable policy choice made for the following reasons. As already stated above, the Employees' Pension Plan is operated mainly under the assessment system. It is a system which allows transfer of income from those who are active in society as employees, to those who are pension-supported. If the expected growth in the number of elderly people and therefore pensioners rises at the rate predicted by the Ministry of Health and Welfare's estimates, it will force active employees to bear an excessive financial burden in terms of premiums. Because employees (and employers) have to pay pension premiums as well as taxes and other social insurance premiums. Therefore, it is not appropriate to place the burden arising from the growing number of older persons only on those who are active in society. Retiring people should also pay some price. Since raising of the pensionable age to 65 does not eliminate the inevitable rise in the premium payment share, active employees also need to share in the burden. Incidentally, the Ministry of Health and Welfare's calculations predict that the premium rate will rise to 29.6 percent in 2025 even though the pension age is raised to 65. The 1994 revision is thus intended to maintain the pension system with both active and retiring employees sharing the burden.
As seen above, measures to raise the pension age from 60 to 65, though acceptable, will seriously affect insured employee who will draw the annuity under the Employees' Pension Plan in future years. First, the insured persons and his family most redesign their life plan. Second, raising of eligibility for all workers to 65 means that they retire from the labour market in later years, and therefore, it is necessary to guarantee employment for those in their early 60s.
1. Raising of the Pension Age in Stages
Raising the age people become eligible to receive employees' pensions in full, straight from 60 to 65 would excessively affect the insured person and his family.Presently, many Japanese enterprises set the age limit (the age at which an employee must retire) at 60. Also the employment environment for those in their early 60s is severe. Thus, many insured workers who have turned 60 would be pushed out of their jobs without having any means of making a living.
Considering the impact raising of the pension age has on insured persons and their families, the government has decided to make the change in stages and over time. The pension age for male workers who start receiving benefit payments at 60 will be gradually raised as shown below.
On the other hand, the government is presently raising the pensionable age of women workers from 55 to 60 by stages through 1999 and further raising the eligibility for female workers to 65 will be five years later than that for male workers.
As exceptions, those with physical and mental disabilities and those who have participated in the Employees' Pensions Plan for a long period of over 45 years will be eligible to draw the annuity in full at 60. The expection also applies to seamen and coal miners.
2. Pensions and Employment for Workers in Early 60s
(1) Problems with the Former System
When the pensionable age for men starts to be raised in 2001, workers in their early 60s in the private sector must depend on wages for a living until they are eligible to draw the annuity in full.The persent situation, however, is that the rate of employment for private-sector workers in their early 60s is not high. Several factors behind this are classified into two broad groups : one resulting from the traditional framework of the Employers' Pension Plan and the Employment Insurance System and the other rising from the labor market. In the former group two are salient factors. First, since the eligible age for the pension scheme is 60 years, workers who receive sufficient pension income choose to retire from active work. On top of that, the Old-Age Pension for Those Still Working weakened the willingness of the elderly to work. The pension payable to those in their early 60s who earn wages but less than a fixed level is called the Old-Age Pension for Those Still Working. The pension benefits were adjusted to wages, however. In short, they have part of their pension deducted according to their earnings. The current system under which the sum of wages plus the pension does not increase with a rise in wages due to an increase in working hours, reduces motivation to work. Second, employees in the private sector who retire at the age of 60, if they seek work but are deemed jobless at a public employment insurance, while receiving Employees' Pension benefits in full. In other words, they are allowed to receive both pension benefits and Employment Insurance simultaneously. This prompts 60-year-old retirees to choose unemployment benefits rather than work.
The latter type of reasons for the relatively low rate of employment of workers in their early 60s, meanwhile, are three-fold. First, almost all major and middle-ranking firms have set their mandatory retirement age at 60, and not a few small-sized companies still cling to the age limit of 60. It is unlikely that the companies would voluntarily advance the retirement age above 60 in the not-too-distant future. Second, many corporations continue to employ some but not all those who have reached mandatory retirement age of 60. Who to continue to employ is left up to the companies. Thrid, there are not many types of jobs and employment forms, such as part-time employment, available to those retirees in their early 60s who want to work.
As we have seen, there are now a variety of factors which hamper continuous employment of those who have reached 60. It is not appropriate to raise the pension age alone to 65 without removing these factors. Consolidating various conditions for workers in their early 60s to enable them to continue to work is necessary along with the raising of the eligible age for the pension scheme.
(2) Revision of Pension System and Employment Insurance System
Revisions of the Employees' Pensions Plan are as follows. First, benefits payable under the Old-Age Pension for Those Still Working were adjusted in accordance with wages. Incidentally, this will continue until the raising of the pension age to 65 is completed in 2013. As before, those who earn a salary have part or all of their pension deducted according to their earnings. The revised Law, however, features a system which allows the total amount of wages and the pension to increase with rising wages. The revision will take effect on April 1, 1995.
Second, the Partial Pension was established in expectation that many workers will be unable to find employment and earn good wages after reaching the milestone of age 60. The Partial Pension will be paid to those in their early 60s before the Employees' Pensions is drawn in full at 65. Under the new Plan, they will receive the earnings-related portion of the Employees' Pension which consists of the basic pension (flat rate pension) plus the earnings-related pension (pension proportional to past earnings). Those who receive the Partial Pension can work to earn a salary but have their pension adjusted in the same manner as under the Old-Age Pension for Those Still Working. In addition, the new Law allows partial pensioners to receive the basic pension before they reach 65.
Third, under the new Law those receiving the Old-Age Pension for Those Still Working or the Partial Pension, if they were deemed unemployed and qualified for the basic allowance of Employment Insurance, would have their pension benefit payments suspended. The revision will go into effect on April 1, 1998.
The Employment Insurance Scheme was revised, with new continuous employment benefits added. Benefits for continuous employment include those for continuous employment of the elderly as well as child-care leave benefits. Benefits for continuous employment of older persons consist of "basic benefits for continuous employment of the elderly" and "benefits for reemployment of the elderly." The former is paid to those who have reached 60 and continue to work and the latter, to those who left work after reaching 60 and then are reemployed. For instance, the former benefits are paid to those whose wages from continous work are under 85 percent of their final monthly salary. The maximum benefit payments of the former are 25 percent of the monthly salary from continuous employment. The benefits are aimed at enhancing the will of retirees to work but are simultaneously regarded as a subsidy offered to employers who will hire those who have reached the mandatory retirement age.
Other revisions were also made to encourage the employment of people in their early 60s. One such revision was the Law for Stable Employment of Older Workers. The revised Law obligates employers to set a minimum retirement age at 60 and to endeavor to continue to employ those who have reached 60. The new revision on a minimum retirement age will take effect in 1998. Also, worker-dispatching businesses employing those over-60s will be asked under the revised Law to remove, as a rule, restrictions on dispatching of workers.
Before starting to rasie the pension age by stages in 2001, the government needs to implement a variety of employment policies in order to increase job opportunities for workers in their early 60s. Also, both management and labor need to propose and carry out measures and policies for the larger pool of workers in their early 60s who will continue to be employed.
III. Other Major Revisions
The revised Employees' Pension Plan contains a variety of other revisions, besides raising the pensionable age and related revisions. Here I will introduce revisions which are significant. The first important revision is on adjustment system of the employee pension payments. The persent Employees' Pension Plan adjusts benefit payments in accordance with the CPI (Consumer Price Index) on a yearly basis and also to changes in nominal wages once every five years. But for active employees who pay a contribution, the Plan calls for calculation of the changing salary is estimated not on the basis of changing nominal wages but on the basis of changing real wages. For retirees, meanwhile, the Plan calls for having past earnings automatically adjusted to the changing nominal wages. The situation is unreasonable since it lacks fairness to those paying in to the system. The reform was thus directed at this aspect of the old Plan. The real objective, however, was to curb rising costs of pension benefits by making growth in real wages the yardstick for adjustment.
The second important revision is on the method of adjustment of simultaneous payments of the Survivor's Pension and the Old-Age Pension under the Employees' Pension Plan. Before the revision was made, when both the husband and the wife were participants in the Employees' Pension Plan and one of the two dies, the other must choose either his or her Ole-Age Pension or the deceased spouse's Survivor's Pension. In many cases, the following complication arises because the amount of the wife's Old-Age Pension is smaller than that of the husband's. When the husband dies first, the wife chooses the Survivor's Pension since the amount of her husband's Survivor's Pension (equivalent to three-quarters of the husband's Old-Age Pension) is larger than her retirement pension. Criticism had thus been voiced that this would make the wife's Old-Age Pension meaningless, thus making her payment of premiums without merit. The revised Law allows her to make a third choice: receiving the sum of two-thirds of the deceased spouse's (the husband's) Survivor's Pension plus one half of the wife's Old-Age Pension.
The third important revision is concerned with payment of premiums for workers on child-care leave. Under the old scheme, workers who took leaves of absence continued to be the beneficiaries of the employees' pensions, with their premiums paid during the period of absence from work being calculated on the basis of standard renumerations prior to taking such breaks. But in many corporations, workers are not paid while on child-care leave and thus employees must pay their share of premiums themselves. This situation placed an excessive economic burden on workers. Thus, the new system allows workers on child-care leave to be exempt from paying their share of premiums.
Some other revisions were also made. These include a rise in benefit levels of the Basic Pension and the Employees' Pension, improvement of the Survivor's Pension and restrictions on income under the Disability pension and approval of an exception for a Class 3 insured person of the Basic Pension.
The revisions of the Pension System as explained above, brought an end to the debate over raising of the pensionable age for the Employees' Pension which had been left undecided for the past several years. However, promoting employment of private-sector workers in their early 60s will be a future task. We must keep a watchful eye on whether substantial results will be achieved from employment policy aimed at improving employment prospects for workers in their early 60s as anticipated under the Employment Insurance Law and the Law for Stable Employment of Older Workers. Also, we need to devise adequate improvement measures for such policies when occasion demands.
Yet the revisions do not mean that all the problems with the Pension System have been settled. The following three issued have yet to be solved, for example. First, is the need to increase the percentage of revenues shared by the government from the current one third to, say, one half. Second, is the guess that female employed workers who pay premiums for the Employees' Pension are underprevileged in the Pension System as compared with full-time housewives who do not pay premiums for the Basic Pension. Third, is the need to amalgamate a public pension insurance system for employees as this is presently divided into a two-tiered system: the Employees' Pension Plan covering employed persons and various Mutual Aid Associations covering civil servants. These issued are left for future discussion.
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