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The Insecure Future of the Japanese Pension System
On July 3, the Ministry of Health, Labour and Welfare (MHLW) released the results of the actuarial valuation it conducts once every five years. The actuarial
valuation serves as a basis for determining the sustainability of the public pension, which has become acause for concern about the nation’s future, and how
the pension system should be in the future. This article
presents an overview of its contents.
First, what is the present pension benefit level? The
income replacement rate (the ratio of pension benefit
amounts to the average take-home pay of men who arecurrently employed) is 61.2% as of the current fiscal
year (on the basis of a model household comprised of ahusband who worked as a company employee for 40
years and a full-time housewife), so pension income
equivalent to around 60% of the earned income of active workers is now secured.
The future outlook varies greatly depending on assumptions including the economic growth rate andchanges in demographics. Under the “growth-type economic transition and continuation case,” which MHLW positions as the desirable situation (and which presumes areal economic growth rate of 1.1%), the income replacement
rate will be 57.6% in fiscal 2037 when the macroeconomicindexation (the adjustment of pension benefit levels so thatthe burden of future active workers will not become excessive) ends, which is just slightly less than the present level(see Table). It appears that conditions have improved inthat the actuarial valuation five years ago (which assumed
a real economic growth rate of 0.9%), under virtually thesame case, projected that the income replacement ratewould decline to 51.9% in fiscal 2046 when the macroeconomic indexation is to end. The ministry explains that theexpanded labor participation of women and of the elderly
and the favorable performance of the pension reserve fundcontributed to the improvement.

However, there are not a few questionable points
regarding the assumptions for the calculations of theactuarial valuation. First, the presumed real growthrate (1.1%), which has the greatest impact on the calculations, exceeds the present potential growth rate
(which is around 0.6–0.7%). Also, the total fertility rate
is 1.36 in the main scenario, but the present performance (1.20) is already well below that level. In as
much as there are talks on possibilities of further declines, assuming the low projection for the total fertility rate (1.13) would be a more conservative perspective. In addition, the actuarial valuation assumes that
164,000 foreigners will move to Japan each year
through 2040. Even though there has been an annual
inflow of around 300,000 persons in the last two years,
it is unclear whether it will be possible to constantly
increase the number of foreigners who reside in Japan.
Considering the actual situation regarding theseassumptions, what may be called a conservative projection is somewhere in between the growth-type economic transition and continuation case and the case reflecting the performance over the past 30 years using
the low projection for the fertility rate. Under this scenario, one can infer from the table that the future income replacement rate will barely exceed the 50%,
which the government positions as the minimum level.
Consequently, it is necessary to advance the future design of the pension system based on the understandingthat the pension is by no means secure rather thanadopting simplistic optimism.
It is also important to recognize that the calculations indicate that the more the real growth rate declines, the more the basic pension benefit level will decline. The calculation of the model household income
replacement rate includes the portion from the employees’ pension program, and individuals who are not reg-2		
October 2024

ular employees or who are self-employed and do not
subscribe to the employees’ pension program will beaffected the most by changes in economic conditions.
The government is expected to determine the contents of pension system revision within this year basedon the results of the actuarial valuation. At present,
multiple revision proposals are on the table including
expanding the subscribers to the employees’ pension
program, but considering the above points, hastily deferring the extension of the period of basic pension premium payments (from age 59 to age 64), which has theeffect of greatly increasing the basic pension portion of

the income replacement rate, must be considered problematic. It is also necessary to deepen discussions ofsystem revision in accordance with increased healthlife expectancy and changes in the work styles ofwomen. And above all, it is desirable to stimulate thenational discussion without turning away from the increased burden on the national treasury accompanying such measures. Rather than devoting trillions ofyen to fixed-amount tax cuts, grants, and temporary
measures to reduce the burden of energy price increases, the government should emphasize setting
forth policies that lead directly to eliminating people’sanxiety about the future from a long-term perspective.

Table: Changes in the Future Projection of the Income Replacement RateMedian projection
Total fertility rate
Net entries low projection(main scenario)
low projection(Total fertility rate: 1.36)(Total fertility rate: 1.36) (Total fertility rate: 1.13)(Net entries: 69,000 persons)(Net entries: 164,000 persons) (Net entries: 164,000 persons)
Growth-type economic transitionand continuation case(real economic growth rate: 1.1%)

57.6% (FY 2037)

56.4% (FY 2041)

56.6% (FY 2039)

Case reflecting the performanceover the past 30 years(real economic growth rate: −0.1%)

50.4% (FY 2057)

46.8% (FY 2065)

47.7% (FY 2062)

Zero per capita growth case(real economic growth rate: −0.7%)

Reserve fund exhausted in
FY 2059

Reserve fund exhausted in
FY 2058

Reserve fund exhausted in
FY 2057

Note: Projections of the income replacement rate after the end of the macroeconomic indexation. Figures inside parentheses show
the fiscal year in which macroeconomic indexation ends.
Source: 2024 Actuarial Valuation by Ministry of Health, Labour and Welfare