Institutional Mechanisms Designed to Promote Elderly Employment and the Improvement of Pension Literacy

IKARI Hiroshi
Senior Fellow, RIETI

A society where all of Japan's 100 million citizens play full and active roles is what Prime Minister Shinzo Abe advocates for in the second stage of his Abenomics economic policy. Indeed, since his return to the leadership in December 2012, the labor force participation rate for elderly people aged 65 years and older has been steadily on the rise to reach 22.2% today, more than three percentage points higher than the level before Abenomics. As such, we are now entering the era in which one out of every four in the pensioner generation will be working.

Elderly Japanese people are highly rated as human resources. In the World Economic Forum (WEF)'s latest Human Capital Report, Japan topped the list in the 65 and over age group (Japan ranked fifth in the overall human capital index covering all age groups). At the same time, however, the report also states that, just as a general observation, the presence of many elderly people in the labor market reflects the absence of a mature pension and welfare system. Building on the above observations, this article will examine the relationship between elderly employment and old-age pensions in terms of regulatory and institutional systems.

Findings from the Longitudinal Survey of Middle-aged and Elderly Persons

The relative level of maturity of Japan's public pension system is debatable, but some people are concerned about the future sustainability of the system. According to the Ministry of Health, Labour and Welfare (MHLW)'s Longitudinal Survey of Middle-aged and Elderly Persons, of those in their 50s who had responded that they anticipated living on their pensions after age 60, only 80% actually started receiving pension benefits when they turned 60. Half of the remaining 20% are not receiving pension benefits even though they have no other source of income. Some of them might have opted to defer their pensions. But in any case, their plans changed in a matter of a few years. This means that a sizable portion of the respondents were not so definite about their pension prospects.

Early and deferred payment options

Regarding the timing of starting to receive old-age pension benefits (Note 1), while the standard pension age is set at 65 years old, prospective pensioners may opt for early payment (receiving benefits as early as age 60) or deferred payment (as late as age 70 (Note 2)). The Table shows how these options are selected. The amount of pension benefits per payment is reduced in the case of early payment and increased in the case of deferred payment. Thus, those who wish to receive benefits early even in reduced amounts have an incentive to opt for early payment, and those who do not mind waiting to receive more are motivated to opt for deferred payment.

Table: Use of Early and Deferred Payment Options for Basic Old-age Pension Benefits in FY2013
Age at which beneficiaries started
receiving benefits (*)
All beneficiariesMale beneficiariesFemale beneficiaries
Share of total
Share of total
Share of total
Early payment3,043,97338.6662,07635.72,381,89739.5
Deferred payment102,1651.333,0971.869,0681.1
(*) The standard pension age is 65 years old, whereas beneficiaries start receiving pension benefits at ages 60 to 64 in the case of early payment and 66 to 70 in the case of deferred payment.

From the Table, we can see that a significant portion (38.6%) of beneficiaries started collecting their benefits before reaching the standard pension age. An attitude survey of those beneficiaries showed that while approximately 30% of them were compelled to opt for early payment because they found it "impossible to make a living otherwise," 35% said they "found it a better deal to start receiving benefits early, even in reduced amounts." However, those who start collecting benefits at age 60, five years ahead of the standard schedule, receive 30% less than what they would have been entitled to per payment. This means that after age 76, the cumulative amount of benefits payable to them will fall below the amount they would have been entitled to under the standard schedule. Given the fact that the average remaining life expectancies for Japanese men and women at age 60 are 23.4 years and 28.7 years respectively, it is not rational to consider early payment a "better deal."

In contrast, those who deferred their pension benefits beyond age 65 account for only 1.3%. In the case of a five-year deferral to age 70, the amount of benefits per payment will be raised by 42% and the cumulative amount will exceed that under the standard schedule at around age 81 and beyond. Given the prospect that both men and women currently aged 65 are likely to live beyond age 81 (with the average remaining life expectancies at 19.3 years and 24.2 years respectively), there should be more people opting for deferred payment. The rationale behind the choice of early and deferred payment options is questionable.

Improving literacy concerning pensions as an insurance against the risk of longevity

As discussed above, making a comparison in terms of the total amount of pension benefits to be received based on the number of years we can reasonably expect to live provides a guide in deciding whether or not to advance or defer the claiming of benefits. At the same time, however, we must not forget the function of pensions as an insurance against the risk of longevity. As choosing the early payment option means receiving a lower amount per payment throughout the remainder of life, the pension's function as an insurance against the risk of longevity will decline. Conversely, choosing the deferred payment option will increase the amount of benefits per payment and enhance the pension's insurance function. In reality, however, women are more willing to advance, and more reluctant to defer, the claiming of pension benefits despite having higher longevity risk, compared to men (see Table). The fact that women are choosing the option that would increase their risk further indicates the need to improve pension literacy to ensure that people understand the risk of longevity properly in choosing the way of receiving benefits.

Institutional design to promote elderly employment

In addition to improving the overall pension literacy, measures should be taken to promote the employment of elderly people so as to prevent them from falling into the situation where they are compelled to opt for early payment because it is "impossible to make a living otherwise."

Amendments to the Act on the Stabilization of Employment of Elderly Persons, which took effect in April 2013, made it mandatory for employers to ensure, on a step-by-step basis, employment opportunities to all employees wishing to continue to work until age 65. Apparently, this led to a significant increase in the employment of elderly workers, with the proportion of companies that allow all employees to continue to work until age 65 jumping from 47.9% prior to the implementation of the amendments to 72.5% at the moment. However, such companies accounted for only 37% in 2007 when the postwar baby boomers reached 60 years old. This particular generation increased the labor force participation rate for those aged 60-64 by about four percentage points (from 52.9% to 57.0%). Had the amendments to the law been made by that time, the boosting effect could have been much greater. In this sense, the year in which the baby boomers reach 70 years old (2017) will be the next critical juncture in designing relevant institutional systems.

Currently, 70 years old is the effective age limit until which the claiming of pension benefits can be deferred. Allowing for a deferral beyond age 70 could provide those wishing to continue to work with an incentive to do so. At one point in time, a system that would allow for a deferral until age 75 was discussed. That can be a viable option for sole proprietors and self-employed persons who can decide when to retire. Indeed, some countries set no age limit in deferring the claiming of pension benefits (Note 3), and Japan, as the world's top longevity country, should have plenty of room to consider adopting such a system.

Elderly employment and pension systems are inseparably linked with each other. Along with the development of a positive environment for elderly employment, more options with respect to the claiming of pension benefits should be made available to choose from. Also, people's pension literacy should be improved so that they can make the reasonable choice in accordance with their respective values and lifestyles based on a thorough understanding of the pension system. In addition to designing an effective institutional mechanism for "social security that provides reassurance," which constitutes one of the three new arrows of Abenomics, the government should also help individuals to make choices concerning the way of working and receiving pension benefits and act in such a way "to make reassured".

November 19, 2015
  1. ^ The discussion in this article is based on the assumption that elderly persons receive only the basic old-age pension, which is applicable to all eligible beneficiaries. Earnings-related old-age benefits under employees' pension insurance (EPI) programs are excluded from the analysis because in the case of those covered by EPI programs, early and deferred payment options may involve adjustments to the amount of basic old-age pension benefits per payment depending on the amount they receive in EPI old-age benefits for active employees.
  2. ^ Even in cases where beneficiaries do not file an application for claiming old-age benefits, they are assumed to have applied upon reaching age 70 for the purpose of calculating the amount of benefits payable, making it the effective age limit for deferral.
  3. ^ In the United Kingdom, there is no age limit for deferral, and deferred pensions are increased by approximately 10.4% per each year of deferral.
  • Ministry of Internal Affairs and Communications' Statistics Bureau, "Labor Force Survey"
  • Ministry of Health, Labour and Welfare (MHLW), "The 9th Longitudinal Survey of Middle-aged and Elderly Persons"
  • MHLW, "Koreisha no Koyo-jokyo Shukei Kekka [Aggregate Information on the Employment of Elderly Persons]"
  • MHLW, "Abridged Life Tables for Japan 2014"
  • MHLW's Pension Bureau, "Heisei 25-nendo Kosei Nenkin Hoken / Kokumin Nenkin Jigyo no Gaikyo [Overview of the Employees' Pension Insurance and National Pension Programs in FY2013]"
  • MHLW's Pension Bureau, "Koreiki no Shuro to Nenkin Jukyu no Arikata [Employment in Old Age and the Claiming of Pension Benefits]" (discussion materials presented to the 25th meeting of the Social Security Council's pension committee)
  • World Economic Forum (WEF), "The Human Capital Report 2015"

November 19, 2015