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News Release

The Need for an Integrated Discussion of the Basic Pension and Livelihood Protection

December 01, 2004

Overview

The basic pension and livelihood protection are currently treated as separate

The need for an integrated reform of social security is currently under discussion in a range of forums, including the "Discussion Group on Social Security". Although this development is to be welcomed, there has been very little discussion of the relationship between the basic pension and livelihood protection, which, as income protection measures, should, properly, be examined as an integrated whole and, of the documents presented by the Ministry of Health, Labour and Welfare to the fourth meeting of the Discussion Group on November 8, 2004, those that have been published suggest that the Ministry is still taking its traditional approach, which is to treat the two as separate.

However, Japan's pension system was modified in 1986 to include a basic pension, and as the objectives of this basic pension, which is intended to cover basic consumption spending in old age, and the livelihood protection system are so close, it is essential that the debate should probe deeper and examine the relationship between the two.

The relationship between the basic pension and livelihood protection should properly be a key issue

The following facts are a clear indication that the relationship between the basic pension and livelihood protection should properly be a key issue.

Beginning with a historical survey, we find that the relationship between pensions and livelihood protection was a central issue in the 1942 Beveridge Report (presented to the British parliament), which served as the basis for the design of social security systems in Europe and the United States after the Second World War. This report proposed the creation of a system of social insurance that would allow people not to rely livelihood protection, the receipt of which carries stigma, but to receive benefits with head held high. The level of benefits would have to be sufficient to provide the minimum income needed for subsistence. The Beveridge Report shows that a system like social insurance and the level of benefits it provides are best discussed in the context of their relationship to livelihood protection.

In recent years, Tony Blair's Labour Government in the United Kingdom has been pursuing an integrated reform of pensions and livelihood protection. First, to cover the deficiencies of the first stage of the pension system - i.e. the "basic state pension", the level of benefits provided by which had fallen low - the second stage was transformed to create a system of benefits that provides generously for those on low incomes. Provided they have paid contributions for a given period, even those on low incomes are now entitled to receive a pension whose amount exceeds (if first and second stages are taken together) the level of livelihood protection. Second, the traditional principle of supplementation, i.e. that, even after a retired person had spent their savings and pension benefits, livelihood protection should only cover the amount needed to make up the minimum income needed for subsistence, was discarded so that the livelihood protection system now rewards the efforts of those of working age to save, pay national insurance contributions, etc.

Further, conditions in Japan have changed in recent years. One change has been in the profile of contributors to the national pension system. Employees make up the largest proportion of contributors to the national pensions, but as employees, they are only entitled to receive a basic pension. Accordingly, it is extremely important that the basic pension should cover the full extent of spending needs in old age, etc. Another change is the "hollowing out" of national pensions - a rise in the numbers of people who either do not subscribe to the national pension system or fail to pay contributions. If it is to redress this problem, the government should consider whether or not the design of the basic pension system, including the level of benefits provided, is attractive to the people of Japan, and whether or not the application of the principle of supplementation undermines the incentive to pay contributions.

The key issues for an integrated discussion

The key issues for an integrated discussion of basic pensions and livelihood protection are as follows:

First, improvement must be made to the design of individual systems. As regards the basic pension, the level of benefits should at least give a clear indication of the value of the basic pension to the people of Japan. The system of defined contributions should also be revised without delay.

Second, the relationship between the level of benefits provided by the basic pension and livelihood protection must be reviewed. Under Japan's current pension system and livelihood protection system, the full basic pension is lower than the level of payments provided under livelihood protection. Moreover, the principle of supplementation may mean that the savings accumulated and the insurance contributions paid during their working years by those in receipt of livelihood protection are effectively worthless. This undermines the incentive to pay insurance contributions. The relationship between the two should therefore be revised.

Third, in addition to a discussion of the relationship assuming that the basic pension and livelihood protection systems continue in their present form, consideration should be given to changing the framework of the system itself, by integrating the basic pension with livelihood protection. Besides the reforms implemented in the United Kingdom under the Blair administration, the pension reforms implemented in Sweden in 1999, for example, transformed the traditional basic pension into a guaranteed pension, the conditions for receipt of which are very loose, and the system was designed to replace the greater part of livelihood protection for the aged. Needless to say, for this kind of discussion to be possible, it will be necessary to abandon the view that pensions and livelihood protection are treated as separate issues.

For more information on the content of this report, please contact
Kazuhiko Nishizawa
Economics Department

Tel: 03-3288-5052
E-mail:nisizawa@rsc.jri.co.jp

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