Is the Employee's Pension Program Politically Viable?

Hideki Konishi and Shimpei Otake
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Hideki Konishi: Professor, Waseda University
Shimpei Otake: Department of Social Engineering, Tokyo Institute of Technology

Public Policy Review, 2009, vol. 5, issue 2, 287-318

Abstract: In recent years, the mass media and young people in Japan often say that due to an aging population and falling birthrate the Japanese public pension system is failing. There has been no research, however, that verifies whether or not it is actually in danger. Since the Japanese pension system is in effect pay-as-you-go financed, whether current insured persons can receive pension in their retirement years depends on whether insured persons of the future generation are willing to pay insurance costs. In this sense, the political element in the viability of the pension system is inherently important. This paper formulates a repeated game in which a majority voting takes place for each period to determine whether to continue with or to halt the pension system with three generations -the elderly, middle-aged, and young- participating, and clarifies the conditions under which the pension system would be politically viable. Then, it simulates whether these conditions hold true for the Employees' Pension Program (second-tier portion, EPP for short), taking account of its revisions in 2004. Based on this simulation, the paper obtained the following results and policy implications. (1) the viability of the current pension system is not as critical as young people and the mass media make it out to be; (2) it is only until the 2020s that the viability of the system is relatively threatened, as there will be a tendency for the degree of viability to increase after the 2020s due to the progression of the aging population combined with the declining birthrate; (3) in order to balance pension financing while securing political stability, it would be effective to conduct reforms that reduce pension benefits for the generation of people who are currently over 50 years old, rather than raise final insurance rates or prolong adjustment periods through the so-called macro economy slides; and (4) reforms which drastically change current fiscal management, such as changes towards a funded system, privatization and the introduction of personal accounts, would be relatively easy to politically implement if doing so up to the first half of the 2020s.

Date: 2009
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