Japan's Pension System -Evaluating the 2004 Reform and Establishing Clear Principles for Further Reforms-

Ole SETTEGREN (Director of the Department of Pensions, Swedish Social Insurance Agency) made the following report titled "Two Thousand Five Hundred Words on the Swedish Pension System."

During the period from 1992-1994 the Swedish pension system underwent a radical reform. The purposes of the reform were fourfold: (1) to aim to attain financial and political stability, (2) to enhance transparency compared with the previous pension system, (3) to enhance equity between the generations, and (4) to guarantee a minimum income.

There were four options for the structure of the pension system, namely a pay-as-you-go system, a fully funded system, a defined benefit pension system, and a defined contribution pension system. In the case of the defined benefit pension system, the risk borne by the insurers, that is the taxpayers, is 100%, whereas in the case of a defined contribution pension system the insured bear 100% of the risk. In the case of defined benefit pension system, the link between contributions and the right to receive an annuity is weak, while in the case of a defined contribution pension system the link is strong.

In the case of the new pension system (Notional Defined Contribution pension system), the pay-as-you-go system with defined benefit shifted to a defined contribution system financed on a pay-as-you-go basis, and also partially to a fully funded defined contribution system.

In the new pension system the mechanism is such as that pension credits arise in the same amounts as the amounts paid, similarly to personal accounts. The amount of payment received is calculated on the basis of changes in the rate of wage increases, and there is also a system called a "survivors bonus," in which pension money of people who die early is passed to longer-living persons.

What triggered the Swedish pension reform was a serious crisis in the 1990s, and the reform proceeded at a very rapid pace.

Another feature of the new system is the guaranteed minimum pension. In the old system, all pensioners were guaranteed to receive a certain amount of basic pension (universal flat rate benefit), whereas in the new system those whose earnings-related pensions do not reach a certain amount are given a certain amount of guaranteed pension equal to the sum of the total of their earnings-related pensions and their guaranteed minimum pension, irrespective of the amount of pension premium paid. Some adjustment has also been made to ensure that for pensioners with the right to receive the guaranteed minimum pension the total amount, including the amount of earnings-related pension, will not be the same for those who have worked actively as it is for those who have worked for only a short period. The guaranteed minimum pension is financed from general tax revenue.

In the new system the survivors' and disability pension schemes that were part of the old pension scheme have been diverted to separate systems. There has been a great deal of debate on this issue, but so far no policy to resolve it has been put forward.

In Sweden there is no great debate about pension rights for housewives. This is because of the fact that in Sweden almost everybody, irrespective of gender, enters the labor market, and very few people fall into the category of housewives. There is high expectation that the new system will enhance the incentive to work and will motivate people to delay retirement.

To this presentation the following comments were made by RIETI Consulting Fellow YAMAZAKI Nobuhiko (Chief of the Actuarial Affairs Division of the Pension Bureau of the Ministry of Health, Labour and Welfare).

In the public pension system there are areas in which individual countries have developed their own unique ways for historical reasons, and areas that are common to a number of countries. Although it is useful to learn about foreign public pension systems, it is essential to distinguish which parts are universally applicable and which parts are unique to the country concerned.

The Swedish system is the same as the Japanese system insofar as it is based upon a pay-as-you-go system while at the same time certain reserves are held and invested in the market. In that sense there are many things to be learned from it.

The new Swedish system is said to be simple, but doubts remain as to the extent to which people understand it.

As for the guaranteed minimum pension, I feel there would be resistance in Japan to the mechanism in Sweden through which people who have been paying contributions to the earnings-related pension, however small the amounts may be, would receive the same amount of pension in total as people who have not paid any contributions at all, after their guaranteed minimum pension is reduced by a corresponding amount. In order to introduce this in Japan there may have to be a mechanism to enable pensioners receiving small earnings-related pensions to receive the full amount of the guaranteed minimum pension, and a means test would have to be instituted.

I understand that identifying the income of self-employed workers is difficult even in Sweden, where taxpayer identification numbers have been introduced. In the Swedish system, if people declare lower incomes and reduce their contributions, the amount of pension benefits from their earnings-related pensions will be lowered, but as the corresponding reduction of the minimum guaranteed pension would be reduced, the total pension benefit amount becomes the same.

As for women's pension rights, I hear that in Sweden the philosophy that everybody should work and have an independent life, regardless of gender, means that the survivors' pension is heading for abolition. In Japan, a housewife or househusband lifestyle is accepted socially as an individual's choice, and it is necessary to pay heed to this kind of difference of national traits.

Responding to these comments, Mr. Settergren made the following comment.

(With respect to the extent of the Swedish people's understanding of the new system) A great deal of discussion took place at the time of the pension reform, but there was no political friction as such, and the people at large are not particularly interested in the pension system. As Swedes feel that the new system will last for a long time, we expect that with the passage of time they will show a more in-depth understanding of the system. On the other hand, the fact of utilizing a means test in the pension system has met with strong opposition from the Swedish people as a whole.

There was an additional explanation concerning the Australian pension system by John PIGGOTT (Professor, University of New South Wales).

The pension system in Australia does not have a long history, and means tests are widely employed for old-age pensions. If the first tier is universal, then taxation has to be increased, and that is very likely to distort the incentive structure. On the other hand, if means tests are administered on a targeted basis the cost would be small, but in that case it is important to supervise the tests to monitor whether the targeting is being carried out properly.