Simulation Analysis of the Revision of the Survivors' Pension System

Author Name FUKAO Mitsuhiro  (Faculty Fellow, RIETI) /NAKATA Daigo  (Fellow, RIETI) /HASUMI Ryo  (Research Assistant, RIETI / Keio University Graduate School of Business and Commerce / Japan Center for Economic Research)
Creation Date/NO. May 2007 07-J-020
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In this paper we discuss the impact of potential proposed revisions to the survivors' pension system on the stability of pension finance and on intergenerational and intragenerational equitability. The three proposals we study are: (1) the proposal that the survivors' pension benefit be reduced to approximately 50% of the husband's benefit, as in Europe, (2) the proposal that the pension benefit received by a husband-wife household be revised to the income-averaging method in which the contributions of spouses are averaged over the duration of the marriage in calculating the amount of pension benefits of the spouses, and (3) the proposal, modelled on the Swedish method, that survivor benefits be separated from the Employees' Pension Insurance system, the funding based on general tax revenue, and employee pensions netted off by the amount of the survivors' benefits, based on the insurance principle.

Our conclusions are as follows. First, so long as the current public pension system is built on the Basic Pension System which apportions benefits to every pensioner, it will not be possible to consider reducing the period of application of the macroeconomic slide system, as that would lead to the destruction of the National Pension System. In view of this, if these revision proposals were implemented it would be appropriate to alleviate the burden of Employees' Pension Insurance premiums. An incidental effect of this would be that the amount of the reserves of the public pension system, which are forecast to accumulate astronomically under the present finite balance system, could be reduced to some degree. This could be expected to have the effect of alleviating or avoiding the risk arising from fluctuations in investment returns.

In addition, with regard to the internal rate of return (IRR) of employee pensions, we examine the impact of each of the revision proposals on different generations within and between types of household. The implementation of each of the proposals would give rise to the existence of vested pensioners who suffer declines in IRR, particularly in the model households for the middle-aged and elderly generations, though many households, in the young generation in particular, would benefit from a lower insurance premium burden. Combined with the fact that under the finite balance system it will primarily be the young generation that benefits from the run-down of the reserves left by the middle-aged and elderly generations, the generation gap can be expected to narrow somewhat. We also confirm that, as would be expected, the reduction and separation of the survivors' pension benefit generally reduces the gap between the model households and the other types of household.