2003 JAPAN LAW: PENSIONS, PENSIONS, PENSIONS
Keywords: Pensions, Labor Law, Self-employed, Salaried Employees, Retirement Benefits, Koreans, Disability, Foreigners, Nationality, Constitution, UN, United Nations
Copyright 2004. All rights reserved Attorney Roderick H. Seeman
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The hottest issue of debate involving workers in Japan has been overwhelmingly about pensions.

At the present time the National Pension Scheme for the self-employed has reserves equal to about 3 years of payment of benefits while the Health & Welfare Pension System for company employees has reserves equal to about 5 years of payment of benefits.

It has been oft noted that Japan is the most rapidly aging nation in the world. Other nations debating their social security system problems  should take note, as Japan leads the world in actually facing the problems and the picture is not pretty. In fact  collapse should not be discounted. While the total reserves of government run pensions as of the end of March, 2003 stood at an impressive 141.5 trillion yen, for the second year running the total of such assets has declined, by 2.8 trillion yen in the most recent year. Thus the run on the bank is beginning. Its downhill from here. Of the 141 trillion yen, 130 trillion yen was in the Health & Welfare Pension system for company employees and 10 trillion yen was in the National Pension Scheme. In addition, although the numbers are hugely impressive, another question is the valuation of those assets. Some experts estimate that as much as 40% or nearly 60 trillion yen, can be classified as of questionable quality, particularly as so much of these funds are invested with the projects of 24 special government corporations, such as the bridge connecting Honshu and Shikoku.   This was much of what was involved in the scandalous resignation of the president of the Japan Public Highways Corporation. The president was accused of producing false financial statements as the company was in reality bankrupt, with liabilities exceeding assets by an estimated nearly $6 billion. Massive amounts of public funds have been invested in these kinds of public works corporations which have as their real objective more the satisfaction of the supporters of powerful politicians, rather than the achievement of solid earnings.

Government finances are in a mess. At present trends the combination of taxes and social insurance premiums, including for pensions, to total national income, already at a heavy 37% could rise to a bone-crunching 61% in 2025. Moreover, it is not just that the factual situation of demographics of Japan is ugly enough,  what with the number of workers supporting each retiree declining from 8.5 in 1970 plummeting to less than half that to 3.6 in 2000 and a truly worrisome less than 2 workers per retiree 20 years from now in 2025. But of more immediate concern is that at the immediate present, younger workers, well aware of this situation appear to be abandoning the system en masse  In fiscal 2002,  an amazing and record breaking 37.2% (an increase of over 8% from the previous year) of workers required to make the monthly payment of 13.300 yen for the national pension system serving the self-employed, simply did not pay. A recent report had it that half of younger workers were refusing to pay. Many are self-employed, making it more difficult for the government to collect. Most amazingly, the Japanese government, so accustomed to a docile and law abiding citizenry, appears at a loss on what to do. In January 2004 the government announced that it would be sending letters to about 500 such people and warning that if they do not pay, it might take actions such as seizing their bank deposits. In reality, however, the last time the government of Japan seized assets for failing to make these pension obligations was in 1991 when it filed FIVE CASES. Amazing. Americans are well aware, as in the movie Grumpy Old Men with Jack Lemmon, the IRS in the USA would happily seize the small home of a retired man for failing to make payments. Here Japanese tax authorities need to take a lesson from the USA. The IRS is the most fearsome property seizing mechanism in the world. At a minimum with such a critical situation, hesitance should not be the order of the day. In reality however, in another accounting “scheme” found too often in government finances, the Ministry of Health, Labor and Welfare is reportedly considering creating a “ten year grace period” particularly for the young people not paying their pension fees. I guess this could be shown under government financial accounts as some kind of  “accounts receivable” of questionable value.

Take the case of comprehensive type pension funds established by small and medium sized corporations. These funds have had preset yields on their investment performance, usually around the range of 3-5% per year and any deficiency in reaching such performance becomes a shortfall in the pensions reserves, to be covered by the companies operating the funds. In recent years with record breaking low interest rates and abysmal stock market performance the average deficiency in these pension reserves is estimated at 2 million yen per policyholder, immense figures that small firms can not be expected to cover. These firms are hoping the government will dissolve these funds and use government funds to cover the deficiencies.

The basic plan by the government is to cut retirement benefits while simultaneously raising pension insurance premiums over the coming years. The first step will be in 2004 when benefits will be cut by a maximum of 0.3%  taking into account the deflation in Japan. These measures would be the same for both the National Pension Scheme for the self-employed and the Health & Welfare Pensions for salaried company employees. Those in the National Pension Scheme are supposed to presently pay 13,300 yen per month. The government is considering raising that to 18,100  yen per month by 2012. Those in the Health & Welfare Pensions scheme pay a percentage of their income, presently 13.58%, paid half by the company and half by the employee. The point to bear in mind in this case is that if the percentage is raised, as planned, it will hit company profits and increase corporate labor expenses. One idea, being pushed by the Ministry of Finance, is to limit the maximum amount of monthly benefit payments to retirees for the National Pension Scheme for those retirees with high incomes. Those who have a monthly income in excess of 500,000 yen would receive a maximum in monthly retirement benefit of only 22,000 yen from the National Pension Scheme instead of the regular 66,000 yen (for those who have been members of the system for 40 years). This would bring about total savings of 200 billion yen, particularly important as the government prepares to increase its share of the burden for paying for retirement benefits from the present 1/3 to ½  sometime between 2004 and 2009. For example in fiscal year 2004 out of total of 16 trillion 700 billion yen expected to be paid in retirement benefits, 5.8 trillion will come directly out of the national treasury, the rest is from the pension insurance contributions and fund earnings.

Even before all of this takes place, the Ministry of Health, Labor and Welfare reported that its survey of retirement benefit payments for college graduates during 2002 was down by nearly 13% from that in effect during 1997.

Under the Health & Welfare Pensions, retirees now expect to receive 59% of their salary prior to retiring. Experts estimate that if the current 13.58% pension insurance premiums was raised to only 16% the scheme could only afford to give the retirees 40% of their pre-retirement salaries. If it is raised to 20% it could hopefully retain benefits at 50% of pre-retirement levels.

While the increase in percentage of the income going to the Health & Welfare pensions would certainly secure higher payouts for the retirees’ benefits, as the companies pay half of the pension premiums, their earnings are hurt. According to the Japan Federation of Economic Organizations, Keidanren, if the percentage is raised to 15% the total profits of all corporations with paid up capital of 5-10 million yen would be wiped out. At a rate of 18% profits at companies with paid up capital of 1 billion yen or more would be halved and if the rate is raised to 20%, 2/3rds of all profits would disappear. In fiscal year 2002 Japanese businesses paid 10.1 trillion yen in premiums for the Health & Welfare pensions.

The Japanese government is planning on one way for shoring up the pension system which would, of course, hit the little guy. Thus the government plans to draft part-time workers into the Health & Welfare Pension plan system. At one fell swoop 4.5 million of the 5 million presently not covered will be forced into the system. The minimum number of hours per week to be dragooned  into the system will be lowered from 30 hours to 20 hours and perhaps lowering the minimum salary subject to pension insurance fees to 650,00 yen per year. The affect on many industries dependent on part-time workers, such as fast food restaurants, would be devastating. As the 13.58% of salary pension insurance premium would be divided equally between the employer and the employee, profits are expected to be cut by 40% in the food service industry when it is initiated. Many are expected to close down. The government will also abolish the system exempting the part-time workers who are the wives of company employees from paying the pension insurance fees.

In another effort to expand the base, the Ministry of Health, Labor and Welfare is considering imposing the pension premium on company employees over 70 years age who are still working. Presently such workers can collect their full pension and still work, but not have to pay the pension premiums.

In a further effort to shore up the assets for the pension system, the government has stated that it will increase its share of the burden from one-third to one-half, despite the horrendous state of Japanese government finances. The increase is expected to cost the government 2.7 trillion yen in the first year. Many expect the government to raise the consumption tax to pay for this.

The government has also started raising the retirement age at which public pension payments will begin. From April 2004 that retirement age will be increased to 62 and that will be steadily raised to 65 by 2013.

The government is trying desperately to keep the maximum deduction for corporate employees for pension premiums to 20% of salary. Nevertheless, if demographic trends continue, even if the 20% is implemented, it would still result in a decline in retirement benefits from 59% of current disposable income to 52%.  

In order to shore up the funding for pension funds for government employees, the Ministry of Finance and the Ministry of Public Management have begun to look into merging the pension funds for national government employees and local government employees, now separate and applying uniform rules on contributions and benefit payments.

With respect to FOREIGN RESIDENTS, six residents of Japan with South Korean citizenship aged 79-83, have sued the Japanese government for 15 million yen each for pension benefits under the National Pension Law. Nationality was removed from the law as a basis for denying pensions in an amendment made in 1982. Nevertheless, the plaintiffs in this case, as they were 35 years or older at the time of the amendment so that they could not achieve the minimum requirement of paying pension payments for 25 years prior to the retirement age of 60. This is the first time that such a suit has been filed against the state by foreigners residing in Japan. It does not appear, ironically, in this case, that any of these plaintiffs ever paid any of the pension premiums but are now seeking 15 million yen. Japanese tax payers pay in for decades and fear getting little back, but here we have plaintiffs seeking recompense while having paid nothing. The Japanese did indeed change the law in 1982 and that specific discrimination has ended.

Another group of Korean residents also had their case rejected by the Kyoto District Court in their attempt to demand 175 million yen in damages and retroactive benefits due to their rejection under the Disability Pensions scheme by the Kyoto prefectural government, which administers the scheme in Kyoto. The law for disability pensions was revised in 1982 to actually permit non-Japanese to join. At the same time however, people over 20 years of age in 1982 were not permitted to join. The plaintiffs fell into that category. In 1997 the plaintiffs asked the prefectural government to give them the pensions. This was rejected. It is not clear, and not likely, that between 1982 and 1997 the plaintiffs had been paying into the pension scheme. The plaintiffs said there had been a violation of the Constitution’s guarantee of equality before the law, as well as a violation of the UN agreements prohibiting discrimination based on nationality.