Recent Changes to Retirement Benefits in Japan, and Relevant Public Policy Issues

Abstract

In Japan, employee retirement benefits started as lump-sum severance payments supported by the book reserve internal funds. In the 1970s and 1980s many of them came to rely on outside pension plans for funding. Combined, these dual-type benefit plans function as a substantial source of old-age income for 60-70 percent of all employees working for approximately 90 percent of employers. In addition, they have been important components of Japan's seniority-based labor management and compensation system. They have been used in order to make core employees stay for a long time with a single employer. As long-term employment and seniority-based compensation practices became not very effective, which can clearly be seen with the rising labor distribution rate, retirement benefits constituting compensation plans had to undergo substantial adjustments. Declining returns on pension assets since the 1990s, and increasing benefit obligations on balance sheets under new accounting rules put into effect in 2001 accelerated the revision of benefit plans. The goals of this plan revision are to: (a) reduce benefit obligations, (b) maintain consistency with other compensation plan components which are more based on job content and performance rather than seniority, (c) make employees with short tenure eligible for substantial benefits by alleviating backloading and by preparing individual account under Defined Contribution Plans, and (d) lighten the burden of benefit obligations on the balance sheet of plan sponsors and reduce investment risks. Specifically, such measures as the revision of benefit formula and the introduction of point -based benefits are taken. Further, the numbers of Defined Contribution Plans, Employee Pension Funds returning contract-out portion and Cash Balance Plans, all of which became available under two laws enacted in June 2001, have been increasing. Public policies on retirement benefits must keep pace with these dynamic changes. Especially, protection of benefit rights - vesting, non-forfeiting and funding requirement, is the area which demands serious attention. Another area to be reformed is taxation. The introduction of EET (exempt- exempt-taxable) taxation uniformly applicable throughout various forms of retirement benefits, which is exemplified by Canadian Registered Retirement Saving Plan, should be taken into serious consideration.