The Future of Social Security Pensions in Japan:
A Review of the 2019 Government Actuarial Report
byNoriyuki Takayama
Distinguished Scholar at the Research Institutefor Policies on Pension & Aging (RIPPA)
andProfessor Emeritus at Hitotsubashi University
October 2020
1. Introduction1
In August 2019, the Ministry of Health, Labour and Welfare, Japan, made open
the 2019 Government Actuarial Report of Social Security Pensions. The Actuarial
Report is published every five years and the 2019 version is the latest one.
The aim of this short note is to describe the three major findings given by the 2019
report and then to reconsider the future picture of social security pensions in Japan.
2. Three Major Findings from the 2019 Actuarial Report
Unexpected Increases in Replacement Rate for the Past 15 Years
One of the drastic reforms in Japan’s social security pensions was made in 2004.
The core of the 2004 reform was that the contribution rate was to be fixed at a certain
level in 2017 and thereafter the pension system would virtually move from a defined
benefit one to a defined contribution one, and that an “automatic balance mechanism”
was introduced for the pension system to have a long-term healthy financing. The
automatic balance mechanism would call for a reduction of the replacement rate stepby step from 60% to 50% for the “model” male employee with his full-time housewife.
According to the 2004 Actuarial Report, the anticipated reduction in the level ofpension benefits would be 0.9% every year in real terms from 2005 on. This
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This paper is mainly based on Takayama (2020).
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percentage is to be decided by changes in demographic factors (the number ofcontributors and the life expectancy at age 65).
The reality for the past 15 years turned to be contrary to the 2004 anticipation.
Japan had been suffering from deflation for more than a decade until 2013. During
deflation, the automatic balance mechanism was suspended to work. Instead, thebenefit indexation to CPI had been in operation. Moreover, the level of take-home
pay for actively working employees decreased more than the decrease in the CPI in
nominal terms for this period. Consequently, the replacement rate for the “model”
male employee with his full-time housewife in the KNH (the social security pension
program for private sector employees) was increased from 59% in 2004 to 62% in
2019. 2This outcome is against the spirit of the 2004 reform. If Japan still preserves thebaseline of the 2004 pension reform, the automatic balance mechanism needs to beredesigned to apply also in times of deflation, with benefits falling faster than theprice level.
Nearly 30% Cut of Basic Pension Benefits Required for Financial Sustainability
The 2019 Actuarial Report made several assumptions in projecting the future
long-term financial performance of social security pensions in Japan. First, it followed
the demographic assumptions given by the 2017 population projections of National
Institute of Population and Social Security Research; optimistic, medium, andpessimistic. Take the medium case for example. The total fertility rate will be 1.44 in2065, while the life expectancy at birth in 2065 will be 84.95 years for men and 91.35
years for women. Second, it assumed two cases in the labor force participation rates(LFPR); a higher case in the future and the other case where they will remainunchanged as those of 2017. Take the former case for example. The LFPR for thosemales in their latter sixties will steadily hike to 72% in 2040, and the LFPR for those
females in their latter sixties will go up to 54% by 2040. Third, the report assumed
six cases in the annual rate of economic growth in real terms, ranging from -0.5% to0.9%. The case Ⅲ, for example, assumed 1.2% for the CPI increase, 2.3% for thewage increase, 4.0% for the rate of return from investment, and 1.6% for the rate of
economic growth, all in nominal terms. Another case Ⅵ assumed 0.5% for the CPI
increase, 0.9% for the wage increase, 1.3% for the rate of return from investment, and0.0% for the rate of economic growth, all in nominal terms, too.
In 2014, the replacement rate was increased up to 63%, then turned to decrease through theautomatic balance mechanism.

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Using the assumptions stated above, the report checked whether or not social
security pensions will maintain their healthy financing for the next 100 years, and also
whether or not they will continue to pay pension benefits no less than 50% as thereplacement rate for the “model” male employee at age 65 with his full-timedependent housewife, provided the current KNH system being kept unchanged. Theresult was that for the Case Ⅰ to Case Ⅲ with a higher LFPR, the system of social
security pensions will meet two requirements above mentioned, while for the Case Ⅵ
with the LFPR unchanged, it will not meet them. A higher LFPR for females andelderly males in the future were found to be a decisive factor in keeping a healthyfinancing of social security pensions.
A healthy financing does not always promise an adequate level of pension benefits,however. The replacement rate of 50% above mentioned is the minimum in the future
which is guaranteed by law for the “model” employee couple who receive combined
benefits of the basic pension (the first-tier) and the earnings-related portion (thesecond-tier). But, no minimum guarantee has yet been provided for the level of basic
benefits solely. According to the 2019 report, the monthly amount of combined
benefits for the “model” employee couple will reduce by 20% in twenty-eight years
from JPY220,000 in 2019 to JPY177,000 in 2047 in terms of the 2019 wages, whereas
the monthly amount of basic benefits per person will reduce more drastically from
JPY65,000 in 2019 to JPY46,000 in 2047, a nearly 30% reduction in twenty-eightyears, as is demonstrated in Table 1.3
Table 1

Estimated Changes in the KNH Replacement Rate andIts Monthly Amount of Benefits at the 2019 Wages
The Replacement Rate (%)

The Monthly Amount of Benefits(JPY 1,000)

Fiscal Year

2019

2024

2047

2019

2047

Basic Benefits(2 Persons Combined)

36.4

35.6

26.2

13091

Earnings-Related Benefits

25.3

24.6

24.69085Total

61.7

60.2

50.8

220177Notes) 1. The replacement rate is for the “model” retired couple at age 65.
2.

The medium case is assumed for future demographic figures.

Source) The MHLW, Japan (2019), The 2019 Government Actuarial Report, Case Ⅲ

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JPY1,000 equals USD9.5 as at 12 October 2020.
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A long-term healthy financing of social security pensions is one of the mostimportant factor for the sustainable system. Japan used to face difficulties in attaining
the financial sustainability of pensions under the rapid population aging with a fertility
decline and the bubble burst of her economy. The automatic balance mechanism
introduced in 2004 was expected to be effective for social security pensions in Japan
to attain their financial sustainability. The 2019 Actuarial Report shows that it will be“too powerful” to do so, forcing an unexpected drastic reduction in the level of basic
benefits. This will cause another difficulties in maintaining an adequate amount ofpension benefits for self-employed persons or atypical workers who are qualified toreceive basic pensions only in their old age as earned entitlements based on theircontributions.
Note that JPY46,000 is a monthly amount of basic pensions per person before tax
and social security contributions are deducted. It will reduce further after theirdeductions, falling to less than JPY40,000. This will be far short of the minimum
standard of living for retired elderly persons in Japan. Incidentally, the mean of basic
consumption expenditure on food, clothing and housing was around JPY52,000 per
month for single retired persons in 2019.
An additional minimum guarantee for the level of basic benefits may be requiredto avoid adverse side-effects of the Japan’s automatic balance mechanism.
Working Longer
The 2019 report further shows what policy options will have to be implementedfor the current replacement rate (62%) at age 65 of the “model” retired couple toremain unchanged in the future. It takes up a couple of age 20 as at FY 2019, whobegan contributing to the KNH at age 20. It assumes that the qualified maximum
contribution years for the basic benefit are to be extended from current 40 to 45, andthat the KNH earnings test for those employees of age 65 and above is to be abolished.
Then, required working years for this couple to enjoy the replacement rate of 62%
turn out to be 45 years and 10 months in Case Ⅲ, while they are 47 years and 3 months
in Case Ⅴ. Thus, if current younger generations work longer than current retirees(who participated in the KNH at age 20, working seamlessly for 40 years, andreceived the KNH pension benefits from age 65), both generations are entitled toreceive the same monthly amount of pension benefits in real terms.
In Japan, life expectancy has been getting longer and longer since 1947, and will
go still further in the future. Under these circumstances, the level of pension benefits
for Japanese might run down in real terms, if no changes in contributing years nor in4

the rate of contributions could take place. Working longer is sure to balance the twocompeting goals for financial sustainability and for maintaining adequacy of pension
benefits. It is the best policy option that the Japanese government currently
recommends in the 2019 Actuarial Report.
3. Discussions on the Normal Pensionable Age
The 2019 Government Actuarial Report did not mention any further increases in
the normal pensionable age (NPA) from current 65. Instead, the government took abasic stance that it is purely a choice problem by each individual when to begin
receiving old-age benefits of social security pensions.
The backgrounds underlying this basic stance are mainly following three facts.
First, it is politically quite difficult for the government to actually implement any
increases in the NPA, which is extremely unpopular. Second, any increases in theNPA will bring little improvements in financial sustainability in the long run under afixed rate of pension contributions with an automatic balance mechanism. Third,
unfavorable effects of any increased NPA are seen only among current and future
pension contributors, while current pension beneficiaries stay undamaged. This mightexacerbate the conflicts between generations.
Today, Japanese people can choose the age when they begin to receive benefitsof social security pensions at their own initiative between 60 to 70, with reductions
or increments in the monthly amounts of benefits. From FY 2022, the upper limit of
their choice is to be expanded to age 75.
If some employee continues to work until age 70, postponing his/her receipt ofpension benefits by 5 years from age 65, then he/she becomes eligible for theincreased monthly amount of benefits by 42% (the rate of increment is 0.7% for eachmonth). Postponing by 10 years from age 65 promises an increase of 84% in themonthly amount of pension benefits. All these increases of benefits are given,provided that the current earnings test is to be abolished for employees of age 65 orabove.4
Japanese government seems to currently prefer giving such greater incentives forthese postponements than to any further increases in the NPA, together withstrengthening policies for employment expansion for those in their latter sixties. 5The abolition of the existing earnings test for those of age 65 or above is not realized yet. It is
one of policy challenges in the near future.
5 Any increases in the NPA can be a matter of policy options in Japan after the automatic balancemechanism fulfills its mission of financial sustainability by reducing the current, too generousreplacement rate.
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4. Concluding Remarks
As stated above, the future of social security pensions in Japan will decisively
depend on 1) future demography, 2) the level of real economic growth, 3) whatchanges in pension programs will take place, 4) how long each individual will makepension contributions, and 5) each individual’s choice when to start receiving pension
benefits. 6
In particular, working longer is a trump card for younger generations to attain thelong-term healthy financing of social security pensions, together with enjoying anadequate amount of their benefits after retirement. It is absolutely necessary forpension policy makers to couple with employment policy authorities in order toactualize working longer, and to induce a higher LFPR for females.
References
The Ministry of Health, Labour and Welfare, Japan (2019), The 2019 Government
Actuarial Report of Social Security Pensions, Main Points and the Related Document
4, 27 August. (in Japanese), available on the website below:
https://www.nensoken.or.jp/wp-content/uploads/shingi16-01.pdf
https://www.nensoken.or.jp/wp-content/uploads/shingi16-04.pdf

Takayama, N. (2020), “Reviewing the 2019 Government Actuarial Report on
Social Securing Pensions in Japan,”『季刊 個人金融』spring, pp. 2-9. (in Japanese),available on the website below:
http://www.yu-cho-f.jp/wp-content/uploads/2020spring_articles01.pdf

The first two serious factors are related to social and economic challenges for Japan herself.
They are almost beyond a control of pension policy authorities.

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