Until recently, Japan’s public pension system was in grave danger of being unable to serve the retirement needs of its people in years to come. But a series of measures introduced by the Japanese government in 2004 have managed to plug the gaping holes in a sinking ship and could, some experts say, even serve as a potential model for the U.S.
Undoubtedly, there are many differences between the U.S. and Japan, not least the structure of their social security systems. Japan’s public social security consists of two-tiers: The National Pension Scheme (NP), a flat-rate scheme covering the whole population, and then an earnings-related tier consisting of the Employees Pension Insurance (EPI) for private sector employees, and the Mutual Aid Associations (MAA), for public sector employees.
Population demographics between the U.S. and Japan are also very different, but even so, the U.S. would be well-served by looking at what Japan has done, says Junichi Sakamoto, chief advisor to the pension management research group at the Nomura Research Institute in Tokyo. Social security in the U.S. will suffer in the coming years from the same financing problem that Japan has narrowly escaped if nothing is done to reestablish equilibrium in the system, and prevent the depletion of the social security trust fund.
The hallmark of the Japanese reform lies in fixing contribution schedules for the future years first and then determining the benefits that can be sustained by those contributions, subject to a floor below which the benefits should not fall.
This mechanism should, in theory, hold in check the rate of increase of pension benefits by taking into consideration both the shrinking labor force and the further extension of life expectancy. At the same time, the government will also increase its funding of the public pension program from the current 33% to 50% in 2009.
By fixing contributions at sustainable levels and reducing benefits within acceptable limits, Japan has ensured that the trust fund ratio for the EPI and other schemes will not fall below one until 2100, thereby reaching a state of equilibrium, Sakamoto says. By contrast, according to the 2006 Annual Report of the Board of Trustees of the U.S. Social Security Administration, the U.S. Trust Fund will be exhausted in 2040, if no measures are taken.