The Japanese retirement income system scored 54.5 on the 2022 Mercer CFA Institute Global Pension Index and a C grade in overall index value after evaluating the retirement income system’s adequacy, sustainability, and integrity. Japan’s retirement income system is comprised of a National Pension System at the national level, the Employees’ Pension Insurance (EPI) at the occupational level, and other private products at the individual level.
National Level
The Japanese national pension consists of two old-age pension schemes, the National Pension Plan (NPP), and the Employees’ Pension Insurance (EPI).
The National Pension Plan (NPP), Kokumin Nenkin is partially a pay-as-you-go system. Half of the cost is financed by the government, while the other half consists of residents’ contributions. It is mandatory for people ages 20 to 59 to pay a flat contribution amount (￥16,610 per month for the fiscal year 2021) (discount and exemption applied under certain circumstances). Every Japanese resident receives a basic flat-rate benefit. This benefit is available when a person reaches 65 years and has contributed for at least 10 years. To receive the full benefit, 40 years of contributions must be made, while those with contributions for between 10 and 40 years receive adjusted benefits. Early retirement is available between the ages of 60 to 64 with a benefit reduction of 0.5% for each month of retirement before age 65. Deferred retirement is permitted until age 70, with a benefit increase of 0.7% for each month of deferral after one month past age 65. Both the NPP and the Employees’ Pension Insurance (below) are subject to annual automatic adjustments based on changes in the cost of living and the national average wage.
The Employees’ Pension Insurance (EPI), kosei nenkin is an earnings-related program. It is mandatory for corporations above a certain size, and contributions are split between employers and employees. Employee and employer pay an equal contribution rate of 9.15% of monthly wage-class earnings, based on 31 wage classes. EPI is not applicable to self-employed people. The government covers the total cost of administration and contributes as an employer.
The retirement age is set to rise gradually from the current 62 to age 65 for men by 2025 and from 61 to 65 for women by 2030. The benefits are calculated in a formula based on an insured’s average monthly wage over the full career, date of birth, and number of months of coverage. For working pensioners aged 60 to 64, the full pension is paid if their combined monthly earnings and old-age pension incomes do not exceed ¥280,000. They will receive a 50% reduction of their benefit if their monthly earnings are between ¥280,000–460,000; the benefit is further reduced if monthly earnings exceed ¥460,000. For working pensioners aged 65 or older, the pension is reduced by 50% of the amount exceeding ¥470,000 if the combined monthly earnings and old-age pension income exceed ¥470,000.
Occupational Level
The Employees’ Pension Fund (EPF) is the traditional voluntary occupational pension. New defined contribution and defined benefit plans were introduced in 2001 and 2002.
The EPFs are a defined benefit scheme that cover firms with more than 500 employees. The first part substitutes the Employee Pension Insurance (EPI). Firms may opt out of the public scheme if their EPF provides 50% higher benefits than EPI, and it is subject to the same benefit formula as applied to the EPI and is paid as an annuity. The second component offers complementary pension benefits. EPF is managed by a management committee with an equal number of employer and employee representatives. The bill to terminate EPFs came into effect in April 2014. Financially stable EPFs are being contracted out or dissolved by 2019 and no new EPFs can be set up. Financially sound EPFs are encouraged to switch to other types of pension plans.
Defined benefit plans can be of the fund or the contract type; both can be established by one or a group of employers. Fund plans must be implemented by establishing a pension fund separate from the sponsoring employer. The pension fund is managed by a management committee, the same as an EPF. Contract-type plans are managed by banks or life insurance companies. Employer contributions for defined benefit plans are tax-deductible without limits. Employee contributions are permitted and are tax-deductible up to a limit of ￥50,000 per year.
Defined contribution plans must be implemented through a contract with a pension management organization. Self-employed people or employees whose employers do not operate an occupational pension plan can establish a personal defined contribution plan, which are managed by the National Pension Fund Association. Employers are required to pay the total contribution, while employee contributions are prohibited. Additionally, the plan must offer its members a choice among at least three investment options, and members must have the opportunity to switch every three months. Members can withdraw their capital as a lump sum.
Individual Level
Additional products for purchase include personal pensions through private insurance companies and trust banks.
Summary Sources
Abe, Jiro, et al. “Regulation of State and Supplementary Pension Schemes in Japan: Overview.” Thomson Reuters Practical Law. October 1, 2022. Accessed March 30, 2022.
Japan Pension Service. “Overview of Japanese Social Insurance Systems. Accessed 04/16/2020.
National Institute of Population and Social Security Research (Japan). “Social Security in Japan 2014.” Accessed 04/16/2020.
National Institute of Population and Social Security Research (Japan). “Population and Social Security in Japan” July 26, 2019. Accessed 04/16/2020.
OECD. “Pensions at a Glance 2019: Country Profiles – Japan.” November 27, 2019. Accessed 04/16/2020.
OECD. “Pensions at a Glance 2021: Country Profiles – Japan.” December 8, 2022. Accessed 03/30/2022.
Pension Funds Online. “Pension System in Japan.” Accessed 04/16/2020.
Social Security Administration. “Social Security Programs Throughout the World: Asia and the Pacific, 2018 (Japan).” September 2018. Accessed 04/16/2020.
Current Issues
On May 29, 2020, the Japanese parliament approved a package to reform the pension system. This package included expanding the range of part-time workers who can join the Employees’ Pension Insurance (EPI or kōsei nenkin), which has only been mandatory for corporations above a certain size until now. The measure is aimed at increasing the number of people paying into the system, especially women and elderly workers who tend to hold part-time jobs at higher rates.
Beginning October 2022, employees working at companies with 101 or more employees will be subject to the EPI. Those employed by companies with 51 or more employees will become eligible beginning October 2024. Currently, only companies with 501 or more employees are subject to the EPI. The revision is expected to lead to an increase of some 650,000 workers participating in the pension program.
The package also modified the EPI earnings test to increase the monthly income threshold for those aged 60 to 64. Currently, EPI pensions are reduced if a pensioner’s monthly combined earnings and pension income exceeds the monthly threshold set by the government. In 2022, this threshold will increase from 280,000 yen (US$2,599.15) to 470,000 yen (US$4,362.86), which will match the existing threshold for those aged 65 and older.
Additionally, the government will increase the maximum age for deferring pension benefits to allow people to choose between the ages of 60 and 75 to begin receiving pensions, raising the upper limit from age 70. As each month of deferral increases pensions by 0.7 percent, this reform allows pensions to be increased up to 84 percent (compared with 42 percent previously).
Summary Sources
Jiji Press English News Service, “Japan Adopts Pension System Reform Plan.” The Japan Times. March 03, 2020. Accessed 04/16/2020.
Nippon Communications Foundation. “Japan Lower House Starts Talks on Pension Reform Bills.” April 14, 2020. Accessed 04/16/2020.
Press English News Service. “Government OKs hiking optional pension age to 71.” The Japan Times. February 17, 2018. Accessed 09/24/2019.
Jiji Press English News Service. “Japan’s Corporate Pension, Insurance Schemes to Cover More Part-Timers.” The Japan Times. August 6, 2018. Accessed 09/24/2019.
Danforth, Ben, John Jankowski, and David Rajnes. “International Update, June 2020.” Social Security Administration. June 2020. Accessed 06/29/2021.
Thomas Wilson. “Japan, short of workers, eyes hiking optional pension age beyond 70.” Reuters. February 16, 2018. Accessed 09/24/2019.
Source: Georgetown University’s Center for Retirement Initiatives
Last Updated 3/30/22