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Japan: Reduction of Pension Payment

(Feb. 1, 2013) During 2012, the Diet (Japan’s parliament) enacted many acts related to comprehensive social security and tax reforms. (Bills Submitted to the Diet in Relation to Comprehensive Social Security and Tax Reforms [in Japanese], Cabinet Secretariat website (last visited Jan. 25, 2013).) The most recent amendment to the National Pension Law was enacted in November 2012 (Act on Amending the Act on Amending the National Pension Law, Act No. 99 of 2012). (Id.)

The Japanese government had started discussions on the reforms a few years ago, and the Cabinet decided on outlines of the reforms of both systems in February 2012. The reforms aim to enhance the functioning of the social security system and to secure its financial resources. (Regarding Comprehensive Social Security and Tax Reforms [in Japanese], Cabinet Decision of Feb. 17, 2012, at 2-3, Cabinet Secretariat website.)

One of the main objectives of the National Pension Law as amended in November 2012 is to create a permanent mechanism for consumption tax revenues to finance 50% of the basic pension. Without such a mechanism, the national government’s burden was 36.5% of the cost of the basic pensions. In recent years, the government found special financial resources to increase the government burden to 50%, but it had become harder to find the financing. (Why Increase the Consumption Tax Rate, Now? [in Japanese], Taki Makoto [a Member of the Diet] official website (Dec. 28, 2011).) Although the permanent funding mechanism was set in 2012, because the consumption tax will not increase until after April 2014, a temporary measure to fill the gap was implemented by means of Act No. 99 of 2012. (National Pension Law, Act No. 141 of 1959, art. 14-2, amended by Act No. 99 of 2012.)

Another main objective of the amended Law is to reduce the pension payment level, which has stayed higher than the level originally set by the Law. The pension program is designed to adjust its payouts to take into account changes in the level of prices, as well as by a factor involving workforce demographics and average compensation. However, when price deflation occurred in Japan in 1999 through 2001, the government did not reduce the payout. A mechanism to permit the payout level to revert to the original level was implemented in 2004, but it did not function in times of deflation. Another such period of price deflation has recurred recently. (Mechanism of Changing the Pension Payout [in Japanese], Ministry of Health, Labour and Welfare [MHLW] (last visited Jan. 25, 2013).)

Under the amended Law, there is a new mechanism to reduce pension payments within set time periods. It reduces pension payouts by 1% in October 2013, another 1% in April 2014, and a further 0.5% in April 2015. (Act on Amending the Act on Amending the National Pension Law [in Japanese], MHLW website (last visited Jan. 31, 2013.)