The Japanese Pension Reform of 2004: A New Mode of ... · the steamrolled legislation. First, we classify complicated pension issues into traditional versus new problems. Second,

The Japanese Pension Reform of 2004: A New Mode of Legislative ProcessAuthor(s): Kenzo Yoshida, Yung-Hsing Guo, Li-Hsuan ChengReviewed work(s):Source: Asian Survey, Vol. 46, No. 3 (May/June 2006), pp. 381-400Published by: University of California PressStable URL: http://www.jstor.org/stable/10.1525/as.2006.46.3.381 .Accessed: 04/11/2011 05:25

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381

Asian Survey

, Vol. 46, Issue 3, pp. 381–400, ISSN 0004-4687, electronic ISSN 1533-838X.© 2006 by The Regents of the University of California. All rights reserved. Please direct all requestsfor permission to photocopy or reproduce article content through the University of CaliforniaPress’s Rights and Permissions website, at http://www.ucpress.edu/journals/rights.htm.

Kenzo Yoshida is Associate Professor in the Department of Economics,Matsuyama University, Matsuyama, Ehime, Japan. Yung-Hsing Guo is Assistant Professor in theDepartment of Managerial Economics and Graduate Institute of Economics, NanHua University,Dalin, Taiwan. Li-Hsuan Cheng is a Ph.D. candidate in the Department of Sociology, Duke Uni-versity, Durham, North Carolina, USA. The authors wish to thank Ryan Denniston for his comments.Email:

�

[email protected]

�

.

THE JAPANESE PENSION REFORM OF 2004

A New Mode of Legislative Process

Kenzo Yoshida, Yung-Hsing Guo, and Li-Hsuan Cheng

Abstract

This article distinguishes between traditional problems in Japanese pensionreform associated with level adjustment and new problems caused by struc-tural changes in Japan’s society and economy. It is suggested that the combi-nation of these new problems with an emerging bipartisan competition led toa steamrolling mode of legislation seldom seen in past pension reforms.

Keywords: Japan, public pension reform, welfare states, politics, legislativeprocess

Introduction

In 2004, pension reform was the most important issue inJapanese politics. The leaders of both the ruling and opposition parties wereforced to resign because of their personal failures to pay their own premiums.The pension reform bill was steamrolled to passage in a manner uncommonin Japanese pension politics.

1

The contentious legislative process of pensionreform in 2004 raises several important questions. Why did pension reform,traditionally a relatively smooth policy arena, suddenly become the focus of

1. Two important examples of recent steamrolling are a law on interception for criminal inves-tigation in 1999 and the reform of medical insurance in 2002.

382

ASIAN SURVEY, VOL. XLVI, NO. 3, MAY/JUNE 2006

political conflicts among the main parties? Why were those mechanisms thatcharacterize Japanese modes of policymaking—including bureaucratic discre-tion and interest group mobilization—replaced by the process of steamrollingin this case?

The existing literature on Japanese politics cannot provide satisfactory an-swers to these questions. Although students of Japanese politics have long de-bated about the nature of Japanese policymaking, the discussion is centered onthe relationships among bureaucrats, politicians, and interest groups.

2

The maintheme of these debates is whether Japanese policymaking is dominated by bu-reaucrats, shaped by heavy networks formed by interest groups, or created bymutual consent among interest groups, politicians, and bureaucrats.

3

The pro-cess of steamrolling is assumed to be a relatively unimportant mode of policy-making in Japan. The literature on Japanese pension reform is also based onthis assumption. Campbell focuses on the role bureaucratic discretion playedin the pension reform of 1985, while Estévez-Abe emphasizes how multiplenegotiations among interest groups, bureaucrats, and scholars have shaped pen-sion reform.

4

The existing literature on Japanese pension reform cannot suffi-ciently explain either the fierce conflicts over, or the steamrolled passage of,the 2004 legislation.

This article argues that two new factors led to the steamrolling of the 2004pension reform: the new problems of the increase of non-payers,

5

which grewmore and more serious in the past decade, and the emergence of a quasi-bipar-tisan political system. As traditional mechanisms were failing to manage thesenew problems, the main Japanese parties offered diverse proposals for pensionreform to attract voters in the 2003 election. The fierce competition among themain parties further intensified conflicts over the proposals and finally led tothe steamrolled legislation. First, we classify complicated pension issues intotraditional versus new problems. Second, we analyze the political process that

2. Even in a newly published volume, this main theme still dominates the discussion. See Ger-ald Curtis, ed.,

Policymaking in Japan: Defining the Role of Politicians

(Tokyo: Japan Center forInternational Exchange, 2002).

3. On bureaucratic autonomy, see Chalmers Johnson,

MITI and the Japanese Miracle

(Stan-ford, Calif.: Stanford University Press, 1982). On the primacy of interest groups, see J. Mark Ram-seyer and Frances Rosenbluth,

Japan’s Political Marketplace

(Cambridge, Mass.: HarvardUniversity Press, 1993).

On mutual consent among bureaucrats, see Richard Samuels,

The Busi-ness of the Japanese State: Energy Markets in Comparative and Historical Perspective

(Ithaca,N.Y.: Cornell University Press, 1987).

4. John Campbell,

How Policies Change: The Japanese Government and the Aging Society

(Princeton: Princeton University Press, 1992); Margarita Estévez-Abe, “Negotiating Welfare Re-forms: Actors and Institutions in the Japanese Welfare State,” in

Restructuring the Welfare State

,eds. Bo Rothstein and Sven Steinmo (New York: Palgrave Macmillan, 2002), pp. 157–82.

5. Non-payers are people who don’t take on the burden of paying into pension funds.

YOSHIDA, GUO, AND CHENG

383

led to pension reform with respect to each group of issues, in order to examinewhy the process was so heated. Finally, we predict possible outcomes of theJapanese pension system reform.

Traditional Problems

The major traditional problem is defined here as the potential imbalance be-tween

burdens

, which mostly consist of premiums paid by working genera-tions to the pension funds, and

payments

, provided as pension benefits for theretired generation.

6

The core issue of the traditional problems is the need for“level adjustment” of personal burden and benefit. Table 1 shows the adjust-ments made in previous public pension reforms beginning in the 1980s. Ac-cording to pension law, the Japanese government must reexamine the balancesheet of the pension system and adjust the premium rates and payments everyfive years. Since 1985, the government has changed pension rules several timesto increase personal premiums and reduce benefits, but it has not succeeded inresolving the traditional problems and still faces the pressure of level adjustment.

We would like to stress that the traditional problems cannot be separatedfrom the financing scheme of the Japanese pension system. The current schemeconsists of increasing premiums at each step, which resembles a pay-as-you-go(PAYG) system more than it does the full-funding system under which the gov-ernment collects the premiums from current working generations to fund theirown retirement lives. Under the PAYG system, the government uses the pre-miums collected from current working generations to support

retired

generations.The Japanese pension structure was inaugurated in 1942 as a full-funding

scheme called the Workers’ Pension System. However, because of high inflationafter World War Two, the real value of benefits could not be sustained withfunded assets and the pension system shifted to the PAYG system. In the 1970s,as benefits vastly improved, the PAYG system was further reinforced. How-ever, after that decade the rising proportion of retired citizens eroded the bal-ance between revenue and expenditure. Students of the pension system havelong debated the choices between the PAYG and full-funding systems buthave failed to reach any substantial agreement.

7

Here, we will address the rel-ative vulnerability of the Japanese pension system to an aging population.

6. For example, see T. Oshio,

Shakaihosho no Ekeizai Gaku

[Economics on social security](Tokyo: Nihonhyoronsha, 2003); and E. Tajika, Y. Kaneko, and F. Hayashi,

Nenkkin no KeizaiBunseki

[Economic analysis on pensions] (Tokyo: Toyokeizaisinposha, 2003).7. In the world’s pension controversy, the World Bank insists on full funding in its report, which

was criticized by the International Labor Organization (ILO) staff. See World Bank,

Averting theOld Age Crisis

(New York: Oxford University Press, 1994); and R. Beattie and W. McGillivray,“A Risky Strategy: Reflections on the World Bank Report Averting the Old Age Crisis,”

Interna-tional Social Security Review

, no. 48 (Oxford: Blackwell Publishing Inc., 1995), pp. 464–81.

384


The current Japanese public pension system consists of two tiers, as shownin Figure 1. The first tier is the Kokumin Nenkin (KN). KN’s literal meaning issimilar to “national pension,” and it provides basic income security for everyaged citizen. The second tier is the Kousei Nenkin Hoken (KNH). Its literalmeaning is “employee’s pension insurance,” and it is the occupational pensionprovided for privately employed workers.

8

The KN was created by the integra-tion of the non-employee worker pension with a flat-rate part of the employee

table

1

Recent “Level Adjustments” of Public Pensions

Adjustments of Benefit Adjustments of Burden

The 1985 Reform Decreasing of benefit:reducing coefficient in the

benefits formuladecreasing a unit price of

contribution in flat-rate benefits

Raising premiums: KNH premium, from

10.6% to 12.4%

The 1989 Reform Introducing a fully automatic price indexation

Obligate students to participate in the KN


12.4% to 14.5%The 1994 Reform Changing the income

indexation system from standard remuneration to disposal income

Shifting the pensionable age from 60 to 65 on flat-rate basic benefits (step by step)

Introduction of special premium (1% of bonus)


14.5% to 17.35%

The 2000 Reform Reductions in earnings-related benefits by 5%

Suspension of the wage indexation (shift to CPI-indexation)

Shifting pensionable age from 60 to 65 on earnings-related benefits (step by step)

Introducing new earnings-test for the older age group (65 to 69)

Changing income base for premium from standard remuneration to total remuneration

Obligate the 60 to 65 age group to contribute to the KNH premium

Considering a raise to the state subsidy from 1/3 to 1/2 by 2004 in the postscript

SOURCE: MHLW,

Nenkin Hakusho

(White paper on pension) (Tokyo: Shakaihokenkenkyusho, 2000).

8. Public employees participate in a pension similar to the KNH called Kyosai [Mutual aid pension].


385

pension in 1985. The KNH is the extra, earnings-related pension whose end isto sustain an employee’s living standard after retirement.

Regular employees join both the KN and KNH and pay half of their pre-mium, 13.58% of their salaries. The other half is paid by their employers. Inthe KN, this group of people is labeled “no. 2-insured.” If their spouses haveless income or work for fewer hours, they are labeled “no. 3-insured.” Peoplein these two groups are entitled to benefits without any requirement of pre-vious contribution. Other citizens, including farmers, self-employers, irregu-lar employees, unemployed persons, and employees’ spouses with a certainlevel of income are only obligated to participate in the KN program. Theypay 13,860 yen ($120) per month to receive KN benefits

in the future

and arelabeled “no. 1-insured.”

What makes the traditional problems worse is Japan’s rapidly aging popula-tion. Although aging is a common issue in developed countries, Japan’s prob-lems are extreme because the country has the highest life expectancy andlowest fertility rates in the world. As a result, the country is aging faster thanany other industrialized nation. The ratio of the population 65 years and olderto that aged 20–64 grew from 9.7% in 1947 to 13.1% in 1975, and 27.9% in2000. If the current fertility trend continues, the aged will constitute 51.9% ofthe population in 2025 and 71.9% in 2050.

9

Therefore, the Japanese pensionsystem faces greater pressures than that of any other country.

9. National Institute for Social Development and Population Problems (NISDPP),

Heisei 15nen Nihon no Shorai Jinko Suike (Chui)

[The population projection for Japan of 2003 (mediumvariant)],

�

http://www.ipss.go.jp

�

, accessed February 20, 2005.

figure

1

The Structure of Japanese Pensions

SOURCE: MHLW, Annual Report on Health and Welfare 1998–1999 Social Security and NationalLife (1999),

�

http://www.mhlw.go.jp

�

,

accessed January 18, 2005.

386


The impacts of aging can be shown in the regular level adjustments since1985. According to pension law, the Japanese government must reexaminethe pension financing system every five years in light of population projec-tions. Each time the government must adjust current levels of premiums andbenefits in order to achieve balance between revenue and expenditures. TheKNH premium rate rose from 7.6% in 1975 to 17.35% in 2002. Further-more, the projection of future premiums changed with this latest reexamina-tion. Under the 1985 reform, the ceiling on future premiums was reducedfrom 38.8% to 28.9% of standard employee income, not including bonuses.In the 1993 estimate, the premium was expected to rise to 34.8%. It was to belowered again to 29.8% with the adjustment of 1994. But in the 1998 esti-mate, it was expected to rise to 34.5%. The increases provoked calls for fur-ther reform. Figure 2 shows the estimated final premium for the period 2000to the 2020s.

figure

2

Projection of the KNH Premium Rate Just after the

1999 Reform Plan

SOURCE: Ibid. to Figure 1.


387

The second most recent reform came in the year 2000. The main goal ofthis reform was to restrict expenditures, rather than increase revenue, primar-ily by reducing retirees’ benefits. As Table 1 shows, this reform contained sev-eral measures, including a reduction of 5% of the KNH benefit, suspension ofthe wage indexing system, and an increase in the retirement age. This reformalso contained three main measures to boost revenues. The first was introduc-tion of a “total compensation basis” under which premium amounts wouldnow be factored from

all

forms of compensation. The second was to increasethe burden of aged employees by requiring those aged 65–69 to contribute tothe KNH premium. The third was to increase subsidies from the general reve-nue from one-third to one-half of basic pension funding. As a result, the finalpremium based on a standard compensation was lowered from 34.5% to25.2%, as Figure 2 shows. However the 25.2% level at that time actuallymeans 19.8% under the present measure, because, under total compensationbasis, the income basis for premiums was expanded to include employee bo-nuses from 2003.

This adjustment left two unresolved problems. First, 25.2% of the premiumwas designed to be paid from general revenue. However, there was no clearprovision guaranteeing supplementary funding from that source, which leftthe funding source uncertain. Second, the established premium rate of 19.8%of total compensation was based on problematic estimations. This figure shouldbe raised to 22.4%, and the final premium of the KN also had to be modifiedfrom ¥ 18,500 ($160) to ¥ 21,600 ($187) in view of the next population pro-jection in 2002. This level of burden is not easy to accept, especially for em-ployers who contribute half of their employees’ premiums. Therefore, in 2003these difficulties forced the Ministry of Health, Labor, and Welfare (MHLW)to draft new reform plans to limit the growth in burden by 2004. Because theseissues were not resolved, Japan still faced the traditional problems and pres-sure for level adjustment as it entered the reform process again in 2004.

New Problems

In addition to the traditional problems, in recent years the Japanese pensionsystem has been plagued by the increasing non-payment of pensions. Thisphenomenon is caused by the disjuncture between the changes in social andeconomic structure and the design of the Japanese pension system. We definethese as the new problems of pensions. Chart 1 shows the changes in the KNHpayment rate, which is the months of payment divided by months that partici-pants have to pay. The payments declined by 24.7% over one decade, from85.7% in 1992 to 62.8% in 2002. This exodus was intense among the youngergenerations. Less than half—49.4%—of the age 20–29 cohort pay the KNpremiums. Unpaid premiums in fiscal years 2000 and 2001 amounted to ¥ 1.9

388


trillion ($16.5 billion). The number of non-payers who had not paid at all fortwo years increased to 3.3 million.

10

Including those who were exempt, almostnine million participants, who made up over 40% of the no. 1-insured of theKN, did not pay their premiums.

Japanese media have often described the exodus as a crisis of the pensionsystem. Although part of the public worry about the system results from exag-gerations by the mass media, there is no doubt that the exodus is a potentiallyserious problem for the Japanese social security system. When participantsfail to pay their KN premiums, their pensions will be reduced through futurepenalties. Furthermore, they cannot receive any benefits from the KN if theyhave not paid for at least 25 years before their retirement. The pension systemwill fail to fulfill its primary goal—providing universal basic income securityfor aged citizens.

Intuitively, this problem seems to result from the rules of compulsory con-tribution and the actual voluntary nature of pension participation, a unique

chart 1 The Payment Rate of the KN Premium (%)

SOURCE: MHLW, “The Condition on Participation and Pay of the KN in 2002,” materials forsectional meeting on pensions in the Council on Social Security, �http://www.mhlw.go.jp�, accessedFebruary 20, 2005.NOTE: Payment rate (%) � months paid divided by months that participants have to pay � 100.

10. MHLW, “Heisi 14 nendo no Kokumin Nennkin no Kanyu, Nohu Jokyo” [Conditions ofparticipation and pay of the KN in 2002], materials for Dai 22 Kai Shakaihosho Shingikai NenkinBukai [Sectional meeting on pensions in the council on social security, 22th] (2002),

�


�

, accessed February 20, 2005.


389

flaw of the Japanese pension system. The MHLW attributed this problem tothe irresponsibility of non-payers and proposed certain measures for compul-sory collection. MHLW’s argument is partly true. According to a ministry sur-vey in 2001, 53.9% of non-payers purchased private annuities or pensions;their average price was ¥ 16,000 ($140), higher than the KN premium.

11

Inother words, some non-payers could afford, but refused, to pay the premium.

Although MHLW officials did have a point, their argument is by no meansthe whole story. We would like to indicate two structural factors involved withthe new problems—the collapse of public trust in the public pension systemand the changing economic structure in Japan. The public distrust is shown ina poll conducted by

Yomiuri Shimbun

in 2003. In the survey, the ratio of re-spondents reporting “I do not trust” or “I somewhat do not trust” for the publicpensions is 53.6%. For those under age 40, the distrust rate was 80%.

12

Sev-eral factors led to this distrust. First, Japanese pension funds were widely per-ceived to be poorly managed. They had been used for a variety of ends withoutcareful evaluation of the risks and thus suffered huge losses on the Japanesestock market after the bubble burst in 1991. The funds had also been used forpublic investment, such as constructing bridges, highways, and so on. Themost notorious example of misuse was the financing of an unprofitable resorthotel chain called the “Green Pier,” managed by former bureaucrats ofMHLW. The total loss was estimated to be as high as ¥ 9 trillion

13

($78.2 bil-lion) during the decade of the 1990s; 40% of the funds may already have be-come bad assets.

14

These facts were repeatedly addressed by the mass media,which generated strong sentiments of distrust among the Japanese public.

15

Second, information about the Japanese pension system is not disclosed suffi-ciently: it is not easy for participants to confirm their projected benefits. Theydo not know their future benefits, but it is widely perceived that contributionsby younger generations will be less rewarded than those for older people,under the current system. The numerous level adjustments have also erodedthe credibility of the pension system. If citizens are not confident about futurecontributions and benefits, exodus may seem a reasonable choice.

The second new structural factor is the tension between the assumptive eco-nomic and social structures behind the pension system and the changes that

11. Social Insurance Agency (SIA),

Koteki Nenkin ni Taisuru Kangae Kata

,

Dai 3 Han

[Theway of thinking about public pensions, 3rd ed.]

(2001),

�

http://www.nenkin.go.jp

�

, accessedFebruary 20, 2005.

12. “Kawaru Nenkin, Nenkin Fushin” [Pension is changing—distrust pensions],

Yomiuri Shim-bun

[Yomiuri News], April 9, 2003.13. Tatsuya Iwase,

Nenkin Daihokai

[Collapse of the pension] (Tokyo: Kodansha, 2003).14. T. Doi and I. Morihiro, “Koteki Nenkin no Tsumitate Kin no Unyo Jittai no Kenkyu” [Re-

search into actual conditions of the management of public pension fund],

Japan Medical Associa-tion Research Institute (JMARI) Report

, no. 38 (Tokyo: JMARI, 2002).15. “Government Pension Fund Logs Big Loss,”

Japan Times

, July 24, 2003.

390


have actually affected these structures. The “model pension” announced bythe MHLW in 2003

16

revealed the assumptive social structure of the pensionsystem. To receive a model pension, a household must be composed of at leastone regular male employee who has worked for 40 years without any interrup-tion plus a stay-at-home female spouse. In other words, this assumption isbased on three structural features of Japanese society: low unemploymentrates, long-term employment, and limitation of women’s roles to homemaker.

However, these assumptive social structures did not hold for Japan in the1990s. Slow economic growth and rising unemployment rates helped exacer-bate the problem of non-payers. Many non-payers did not contribute simplybecause they could not afford to. According to the Social Security Agency(SSA), 62.4% of non-payers claimed that the premium was too expensive forthem. The average annual income of non-payers was ¥ 3.3 million yen ($28,700),only about three-fourths the average income of contributors, at ¥ 4.2 millionyen ($36,500). A total of 17.7% of the non-payers had an income lower thanone million yen ($8,600), in comparison to 11.7% of payers.

17

Institutionalchange was also partly responsible for the increase in non-payers. Half of the8.1% drop in number of payers from 2001 to 2002 can be attributed to renewedexemption rules that suddenly canceled the exempt status of many people.

18

The increasing number of non-payers cannot be separated from changes inthe labor market. In 1990, Japan’s unemployment rate was only 2.1%, the low-est among industrialized countries. Because of recession and global competi-tion, the rate increased to 5.4% in 2002, more than doubling during thedecade.

19

Types of employment were also increasingly diversified. As Chart 2shows, the ratio of irregular employment to total number of employees (exceptexecutives) rose from 19.7% in 1987 to 31.9% in 2002. The number of irregu-lar employees doubled from 8.1 million to 16.2 million during the same pe-riod. This number rose by four million in the past five years, while the totalnumber of employees decreased.

Younger generations suffered more from changes in the labor market. In2002, the unemployment rate of the age 15–24 cohort was 9.9% and for the

16. The model benefit under the public pension system is ¥ 238,000 ($2,070). This representsthe sum of basic pensions (at ¥ 130,000 [$1,130] per couple) and a KHN of ¥ 104,000 ($904). Themodel replacement rate, which is the rate of the model pension’s benefit to the average income ofa representative male worker, is 59%. See MHLW,

Nenkin Kaikaku no Houkousei ni KansuruKokkaku to Ronten

[The direction and issues on the frame of pension reform] (2002)

�


�

, accessed July 10, 2003.17. SIA,

Kokumin Nenkin Minosha no Jittai Chosa

[The investigation into the actual condi-tions of non-payers of the KN] (1999),

�

http://www.sia.go.jp

�

, accessed February 20, 2005.18. MHLW, “Heisi 14 nendo no Kokumin Nennkin no Kanyu, Nohu Jokyo.”19. The Statistics Bureau,

Rodoryoku Chosa

[Labor force survey],

�http://www.stat.go.jp�,accessed February 20, 2005.

YOSHIDA, GUO, AND CHENG 391

24–35 cohort, 6.4%. The diversification of types of work also impactedyounger generations more than older ones. The ratio of irregular employmentwas 72.4% among workers of the age 15–19 cohort and 40.7% in the age 20–24 group, but it was only 24.8% for those aged 35–39 and 28.4% for 40–44year-olds. The job shortage was more serious for new university graduates.The rate of employment of university graduates fell during the 1990s and be-yond from 81% in 1990 to 55.1% in 2003.20 In other words, a great proportionof new graduates are jobless or holding part-time jobs. In Japan, they arecalled furita or “freeters” (contingent workers).21

The changing labor market increases the number of no. 1-insured within theKN. The number of people in this category grew by over three million between1992 and 2001, from 18.5 million to 22.1 million, while the number of no. 2-insured decreased from 38.3 million to 36.9 million.22 Since 1997, four mil-lion people have changed their status from no. 2-insured to no. 1-insured everyyear, accounting for over 60% of new participants in the no. 1-insured category.23

Although the no. 1-insured are generally poorer than the no. 2-insured, theformer often pay greater portions of their income in premiums. Irrespective of

chart 2 The Ratio of Irregular Workers in Employees Except Executives (%)

SOURCE: The Statistics Bureau, Shugyo Kihonchosa [Employment status survey] (1982–2002),�http://portal.stat.go.jp�, �http://www.mhlw.go.jp�, accessed February 20, 2005.

20. The Ministry of Education, Culture, Sports, Science, and Technology (MECSST), GakoKihon Chosa [Basic survey on schools], �http://www.mext.go.jp�, accessed February 19, 2005.

21. R. Kosugi, Furita [Contingent workers] (Tokyo: Keisoshobo, 2003).22. SIA, Nenji Hokokusho [Annual report], �http://www.sia.go.jp�, accessed February 20, 2005.23. MHLW, “Heisi 14 nendo no Kokumin Nennkin no Kanyu, Nohu Jokyo.”

392 ASIAN SURVEY, VOL. XLVI, NO. 3, MAY/JUNE 2006

income, each participant must pay the fixed premium, ¥ 13,860 ($120) permonth, to receive full benefits in the future. On the other hand, the no. 2-insuredonly have to pay half of the premiums, since the other half is paid by their em-ployers. Additionally, the no.1-insured must deal with the program procedureby themselves, while the no. 2-insured generally have it handled by their af-filiations. Therefore, the poor are reluctant to pay into the no. 1-insured pro-gram. Indeed, the payment rate of those who moved from the no. 2-insuredgroup to the no. 1-insured group is only 52.6%, and that of college graduates,44.7%. Both figures are lower than the average rate of 62.8% in 2002.24

In summary, the payer exodus results both from distrust for the manage-ment of the pension system and from a discordant design of Japanese pensionsin the context of structural changes in the labor market, which we define asnew problems. In the next section, we will examine how these issues weredealt with in the reform process.

The “Pension Election” of 2003The path to the pension reform of 2004 can be divided into the following threestages. The first was election of legislative representatives in the summer of2003. The second was negotiation within the coalition of ruling parties andministries, including the Liberal Democratic Party (LDP) and Komeito, theMinistry of Finance (MOF), and MHLW in the fall of that year. The third wasdiscussion between the ruling and opposition coalition parties in the springof 2004.

Background of the ElectionFor two reasons, the 2003 Diet election can be seen as a milestone in Japanesepolitical history. It was the first election in which the main parties publiclypledged their manifestos. This action was widely seen as a symbol of depar-ture from traditional political mobilization based on factions and patronage.Second, the Democratic Party of Japan (DPJ) became the largest non-LDPparty since the formation in 1955 of the LDP regime that dominated Japanesepolitics for 38 years before collapsing in 1993. Although since that year theLDP has failed to win a lower house majority on its own in any general elec-tion, the lack of a stable alternative has kept the party in office. The rise of theDPJ implies the emergence of a stable, powerful opposition party that hasthe potential to replace the LDP. In other words, the Japanese political systemhas shifted to a quasi-bipartisan system.

Widespread public concern made pension reform one of the primary policyarenas in which the main parties competed in the 2003 election. According to

24. Ibid.


polling in Nikkei Shimbun, the greatest concern of Japanese people prior to theelection had been economic policy, which might be inferred from the long re-cession. However, in the 2003 poll, 60% of respondents chose social securityas their primary concern, surpassing those who chose the economy.25 For thisreason, the 2003 Diet election was widely referred to as the “pension election.”26

Pension System Issues in the ElectionIn this section we introduce the proposals for pension reform submitted by themain parties (see Table 2). We divide the issues into old and new problems asdescribed above.

Issues regarding traditional problems. Two main issues were related to thelevel adjustment. The first was the transfer of general revenue to the KN. Allof the main parties supported some sort of adjustment; the only minor dis-agreement was over the timing and financial source of the transfer. The secondand central issue was adjustment for the future balance of paid premiums andreceived benefits. At first glance, the two main parties seemed to disagreestrongly over this issue. The LDP favored restraining the rise of premiums,while the DPJ emphasized keeping benefits at current levels. Despite this dis-agreement, neither party elaborated concrete plans or schedules of balances.The only party that offered substantive plans was the New Komeito: its planwas almost totally based on one promulgated by the MHLW in summer 2003.This plan was also called “the Sakaguchi plan,” from the name of the MHLWminister, Sakaguchi Chikara, a member of New Komeito. This plan was widelycriticized for its emphasis on maintaining benefits without considering meth-ods of containing the financial burden for businesses. Because of the technicalnature of the problems and disagreement within the ruling coalition, issues cen-tering on level adjustments did not inspire heated debate during the election.

Issues regarding the new problems. Unlike their approaches to level adjust-ment, the main parties had diverse plans to solve the new problems. The rulingparties planned to maintain the current system; the opposition preferred a tax-based approach. Officials of the ruling coalition, composed of the LDP and theNew Komeito, stated that they would keep the general structure of the currentpension system.

All opposing parties proposed structural reform. The DPJ, the leading op-position party, proposed a redesigned system in which pensions would still becomposed of two tiers. The first tier would be the National Basic Pension,

25. “Zenkoku Yoronchousa no Kekka” [Results of nationwide public opinion poll], NikkeiShimbun [Japanese Economic News], September 24, 2003.

26. “Sosenkyo Saidaino Soten Tuikyu, Nenkin Manyufesuto Taiketsu” [The general election,a showdown on pension manifestos], Shukan Asahi [Weekly Asahi], October 31, 2003.

table 2 Parties’ Proposals for Pension Reform

Issues Concerning Traditional Problems Issues Concerning New Problems Other Issues

1st Tier Pension

Financed by Taxes

2nd Tier Pension

with Benefit Reflected Each Contribution

Disclosure and Reform of the Management

of the Pension Fund

Relief for Non-payers

Division of the

Pension Right in Divorce

ConsumptionTax as

Financial Source of Pensions

Raising the State Subsidy to the KN Balance of

Burden and Benefit

TimingSource of Revenue Benefit Burden

Ruling parties

LDP by 2003 restrain national share rate under 50%

� conduct national discussion onfuture raise

Komeito by 2008, step by step

tax on high-incomeretirees, etc.

model benefit is 50%–55% of average net income

final premium of the KNH is 20% of total remuneration

� opposing immediate raise

Opposition parties

LP by 2008 review of wasteful expenditure

keeping current levels on the part of past contribution

� � � set it as sourceof National Basic Pension

SDP by 2004 review of wastefulexpenditure, etc.

protection of pensions of low-income people

reduction in KN premium from ¥ 13,300 to ¥ 10,000

� � � � � opposing animmediate raise

JCP by 2004 review of wasteful expenditure and military budget

criticizing recent reduction

� � � opposing araise

SOURCE: Campaign promises of each party, in Yomiuri Shimbun, October 8, 2003.� � insisted on in promises.� � implied in promises.NOTE: New Conservative Party excluded, because it was absorbed into the LDP just after the election.


whose function would be similar to that of the current KN, but which wouldbe financed by taxes. The second tier would be an Earnings-Related Pension,similar to the National Defined Contribution (NDC) system in Sweden, andwould be funded by earning-related premiums.27 The received benefits wouldbe tied to the paid premiums. The function of this second tier is similar to thecurrent KNH, but it would have more comprehensive coverage, and the rela-tionship between premiums and benefits would be clearer. The DPJ also pro-posed to disclose details of the management of the funds. Other oppositionparties took similar positions.

The goals of this proposal were mainly to cope with the new problems. TheNational Basic Pension, financed by taxes, would help to maintain the prin-ciples of universal coverage that the Japanese pension system strives toward.The tax-based system would also solve the problems of premiums being com-pulsory in theory and voluntary in practice. Second, the redesign of the secondtier and disclosure of the fund management could help to recover the publictrust with respect to Japanese pensions. The redesign was oriented towardstructural reform rather than specific adjustment figures.

Outcome of the Pension ElectionTwo factors prevented the old problems from becoming the core issue in the“pension election.” First, level adjustment is a highly technical issue tradition-ally handled by bureaucrats and via negotiation among social groups. There-fore, little room was left for the politicians to offer proposals to attract voters.Second, because the adjustment of premiums and payments would inevitablydamage some social groups’ interests, the main parties were reluctant to raisethe issue during the election.

On the other hand, new problems received more attention from the mainparties. Because traditional mechanisms had failed to fully solve the newproblems, there was room for the main parties to make distinctive proposalsfor pension reform. In other words, through the election mechanism the voterswere asked whether the Japanese pension system should be redesigned in re-sponse to structural changes in society.

After fierce competition, the coalition between the LDP and Komeito won244 seats, a majority (see Table 3), even though DPJ, the primary oppositionparty, had a 40-seat gain from 137 to 177. The other opposition parties couldnot even retain half of their pre-election seats.

With respect to the pension policy, the outcome of the election implied thatvoters did not choose radically to redesign the pension system. It seemed that the

27. About NDC, see N. Takayama, ed., Taste of Pie: Searching for Better Pension Provisionsin Developed Countries (Tokyo: Maruzen Ltd., 2003).


LDP’s proposal of pension reform gained public approval. However, post-election negotiations aroused more controversies about the future of the Japa-nese pension system. In the next section, we will discuss how the pension reformwas dealt with in the legislative process.

The Pension Reform of 2004Return to Level Adjustment

After the election, members of the ruling coalition discussed how to transformtheir manifesto into policies. The key issue in the pension reform plan was thetraditional problem of balancing premiums and benefits. However, the mani-festo contained no specific plan for how to adjust the imbalance. This tradi-tional problem was discussed mainly within the ruling coalition and relatedministries—the MOF and MHLW. Table 4 summarizes the disputes that oc-curred within the ruling coalition before final agreement was achieved. Thecoalition initially planned to raise pension premiums to 20% of employee in-come, according to the MHLW plan. However, this plan was opposed by busi-ness groups because of the heavy burden on enterprises. Eventually, MOFbureaucrats suggested that premiums be raised only to 18% of employee income.This proposal was strongly opposed by Komeito because it made difficult thelimiting of benefits to 50% of the average employee’s salary.

After political negotiation, LDP, Komeito, MOF, and MHLW reachedagreement on a public pension reform plan on February 4, 2004. Employeepremiums would be shouldered equally between employees and employersand would rise from the current 13.58% to 18.3% of employee annual incomeby 2017. Meanwhile, benefits would be lowered from the current 59% of an-nual salary to no less than 50%. In addition, a macro-slide adjustment was in-troduced that would automatically adjust benefits in relation to economic andpopulation growth. With this device, certain issues concerning the traditionalproblems will be managed without new reform legislation. This agreement

table 3 Change of Parties’ Seats in the Lower House Election, 2003

Party Pre-election Post-election Change

Liberal Democratic Party (LDP) 246 244 (4 from NCP) �2New Conservative Party (NCP) 9 absorbed by LDPNew Komeito (Komeito) 31 34 �3Democratic Party of Japan (DPJ) 137 177 �40Social Democratic Party (SDP) 18 6 �12Japanese Communist Party (JCP) 20 9 �11

SOURCES: Mainichi Daily News and Japan Times, November 10–18, 2003.


constituted the original plan of the pension reform bill of 2004. The relativelysmooth process of level adjustment confirms Campbell and Estévez-Abe’sanalyses of Japanese pension politics.28 The traditional mechanism of policy-making can deal successfully with traditional problems.

Steamrolling in the DietThe pension reform plan had been discussed in the Diet from March 2004 tothe date of implementation, June 5. However, the process was far from smooth.The most important events that occurred may have been the pension scandalsinvolving leading politicians in the two main parties. Initially, the DPJ criti-cized the bureaucrats for problematic usage of pension funds, such as buildingapartments for themselves, financing unprofitable resort hotels, and so on.29

An actress appearing in a government campaign to promote participation inKN was accused of getting a deal from the LDP that allowed her to waive herpremium. In May the DPJ accused some LDP Diet members, including cabi-net officers, of failing to pay premiums. In reply the LDP pointed out that sev-eral DPJ Diet members had also failed to pay premiums. The Diet was dominatedby this dispute for several days. Consequently, several Diet members, includ-ing the kanbo-chokan (chief cabinet secretary) and the leader of the DPJ, wereinvolved in this scandal; some were finally forced to resign from their executiveposts.

Passage of the reform bill was handled in an unusual manner. The bill waspassed in an April 28 meeting of the House of Councilors’ Welfare and WorkCommittee and in a plenary session of the House of Representatives on May11. However, during the legislative process the DPJ adopted a strategy of dis-playing disapproval through absenteeism. At a subsequent discussion at theHouse of Councilors, the bill was passed through an unusual procedure known

table 4 Disputes within the Ruling Coalition about the Pension Reform Plan

PlanPremiums’ Upper

LimitationsBenefits’ Lower

Limitations Objections

MHLW 20% of salaried workersannual income

business circles

LDP, MOF 18% 49% KomeitoAgreement 18.30% above 50%

SOURCE: Nikkei Daily News, December 14, 2003.

28. See Campbell, “How Politics Change”; and Estévez-Abe, “Negotiating Welfare Reforms.”29. “04 Sangiinsen Soutenwo ou, Nenkin Fushin to Kanshin” [Issues of the election in 2004,

distrust and concern on pension], Asahi Shimbun, June 6, 2004.


as steamrolling. On June 2, the chairman of the Welfare and Work Committeestopped accepting questions and decided to force the start of voting on theplan. On June 5, the ruling party rammed the bill through the plenary sessionin a similar manner. Members of the opposition coalition fiercely protested thisaction and tried to obstruct the proceedings with heckling and by forcibly snatch-ing chairmen’s microphones at both the committee and the plenary session tostop the legislation.

The key question is: why could the traditional problems of pensions bedealt with in a relatively smooth, consensual manner while the new problemscould not? We suggest that the conjunction of the bipartisan system and thenewly emerging problems is responsible for making the legislative processcontentious. On the one hand, emerging bipartisan competition created an in-centive for the DPJ to sharpen its opposition to the ruling coalition in order toimprove its position for the summer 2004 elections.30 On the other hand, theDPJ was unable to say much about the traditional problems, which were moretechnical and relatively well dealt with by traditional mechanisms. The newproblems provided an important opportunity for the opposition party to under-line its differences with the LDP.

The DPJ proposed “unification of pensions” and asserted that the govern-ment plan would be unable to cope with the new problems. The ruling coali-tion responded that its plan had been approved by the voters and thus had noneed of alteration. Discussions over the new issues were difficult to manageunder the traditional method because the issues tended to involve the pensionbureaucracy, which had coordinated or led past pension reforms. What exacer-bated the conflict was bureaucrats’ public disapproval of the DPJ’s plan. TheMHLW published official pamphlets strongly criticizing the proposals to rede-sign the pension system and tax-based pension financing.31 Although a coalitionbetween bureaucrats and LDP politicians is by no means a new phenomenon, theintensified competition highlighted this issue and worsened opposition parties’trust of the extant mechanisms.

The emerging bipartisan competition and the opposition parties’ distrustof the existing system prevented any conciliation between the plans proposedby the LDP and the DPJ. When DPJ Diet members discussed the new prob-lems, they sometimes accused the ruling coalition of “swindling”32 becausethe latter had failed to provide plans to fundamentally solve the new problems.

30. Such a change of political conditions can be a factor in ending the long period. F. Baum-gartner and B. Jones (1993) pointed out such dynamics using the concept of punctuated equilib-rium through a history of U.S. policymaking. See F. Baumgartner and B. Jones, Agendas andInstability in American Politics (Chicago: University of Chicago Press, 2003).

31. SIA, Kokumin Nenkin Minosha no Jittai Chosa.32. National Diet Library, Kokai Kaigiroku [The official record of the proceedings of the Diet],

April 4, 2004, �http://www.ndl.go.jp�, accessed February 20, 2005.


However, DPJ legislators did not provide any alternative on the issues con-cerning level adjustment but implied that they could not accept any aspect ofthe ruling coalition’s plan. On the other hand, members of the LDP accused theDPJ of being “unreal” because it had failed to provide concrete plans for the bal-ancing of burden and benefit. The interaction between newly emerging issuesand new political structures finally reduced chances for cross-camp negotiationand led to the steamrolling of legislation.

Subsequently, a bill to eliminate the pension reform of 2004 was submittedby the DPJ along with a reform promise in the House of Councilors electionon July 12, 2004, when the DPJ acquired some seats. The bill was nonethelessrejected by majority vote in the Diet on August 5, thereby concluding discus-sions over pension reform.

Conclusion: Prospects for the Japanese Pension System

In this article, we have analyzed the process of the pension reform of 2004 andreached two primary conclusions. First, the Japanese pension system faced notonly the traditional issues of level adjustment but also new issues resultingfrom the changing social structure and declining authority of the bureaucracy.Second, the new problems provided a stage for parties in the newly emergingbipartisan system to highlight their different proposals for pension reform. Be-cause the traditional problems were well managed by the traditional mechanism,the solution of new problems became the battlefield for the two dominant camps.

Let us touch on the future prospects for Japanese pension reform. First, be-cause this recent wave of reform lacks a clear provision for supplementaryfunding and the aging problem continues to worsen, we believe that the imbal-ance between premiums and benefits cannot be easily solved and that the leveladjustment problem will inevitably continue. Whether to increase taxes to fi-nance the pensions may be a key issue in the next wave of pension reform. TheJapanese government has to continue to adjust the pensions by taking intoconsideration the aging population, using the traditional method to negotiateand implement the macro-slide adjustment system.

Second, the new problems will also play an important role in future pensionreforms. The opposition party rejected a proposal of the LDP to discuss thisissue together in a special subcommittee, and introduced a new bill for the Na-tional Basic Pension and “the unification of pensions” to the Diet on Novem-ber 19, 2004. However, because of two factors, it may be possible to reach anagreement among the parties in the long run. First, the DPJ gained 50 seats,versus the 49 seats gained by the LDP in the election of 2004, just after thepension reform. In particular the DPJ secured a majority in the urban areas inthe elections of both 2003 and 2004. The new political structure may force the


LDP to seek common ground with opposing coalitions. Second, the two mainparties are gradually converging toward a common substantial redesign of thepension system. As the DPJ has proposed a basic pension that is sustainedwith a consumption tax, the consumption tax has been approved by the LDPas a source of long-term revenue for social security. The only problem withthis proposal is the frustration experienced by the LDP when it attempted toraise the consumption tax in 1989 and 1998. However, because both main par-ties agree to use the consumption tax to finance pensions, and the Federationof Economic Organizations (Keidanren), the largest business group in Japan,has also publicly supported this proposal, the LDP will likely face less censurefor raising the consumption tax.33 The emerging consensus on pension financemay reforge the linkage politics characterized by multiple negotiation, whichis currently the dominant mode of pension politics.34

Finally, we also will try to predict the future of Japanese policymaking. Asthe bipartisan system gradually emerges, we believe that party competition willplay an increasingly important role. Any new issues that cannot be well resolvedby the old mechanisms may be exploited by the two main parties as providingpolitical opportunities. We believe that pension reform in 2004 may not be thelast case that passes in such a contentious manner. This emerging mode of policy-making deserves more attention from students of Japanese politics.

33. Keidanren, Kishakaiken ni okeru Okumura Kaicho no Hatsugen Yoshi [Summary of Presi-dent Okumura’s speech in press conference], October 6, 2003, �http://www.keidanren.or.jp�, ac-cessed February 20, 2005.

34. On linkage politics, see Estévez-Abe, “Negotiating Welfare Reforms.”

Documents

The Japanese Pension Reform of 2004: A New Mode of ... · the steamrolled legislation. First, we classify complicated pension issues into traditional versus new problems. Second,