01/11/2000

Evaluating the Effect of Recent Reforms to the Employees' Pension System

Shigeo Mori 

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Introduction

Due to structural changes in the economy and the continued decline in birthrates, if the Employees’ Pension System (kosei nenkin seido) — whose most recent recalculation was conducted in 1994 — is left as is, the final premium rate is expected to rise to 34% of monthly income. When social security premiums and other taxes are taken into account, the public’s burden increases to over 50% of income. Not only is this burden large, but it increases for later generations, creating the problem of inter-gener-ational inequity. The 1999 reform and recalculation aims primarily to reduce the final premium rate, minimize inter-generational inequities, and bring about a stable and sustainable pension system.

The present Employees’ Pension System has various transitional measures to assure fairness, making it rather complex. Since it is basically a pay-as-you-go system that funds benefits out of premium income in the same year, the only way to keep premiums from skyrocketing is to either reduce benefits or slow their growth.

The latest reform contains measures to either curtail the growth of or reduce benefits. To better grasp the significance of these reforms and the size of their impact, we conducted simulations using NLI Research Institute’s Simulation Model for the Employees’ Pension System. We hope the results pro-vide a more accurate grasp of conditions and contribute to further quantitative analyses toward the next revision in the future.

Shigeo Mori

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