1. Who Will Pay for Our Old Age
Who Will Pay for Our Old Age? A Cross-National Comparison of the Scope of Social Policy Reforms in Germany and Japan Andreas Hoff & Tetsuo Ogawa

2. 3. The Current Debates of Social Security Reforms in the EU and Japan
1. Introduction
2. The Role of Social Policy Measures for Sustaining the Welfare of Old Aged People
3. The Current Debates of Social Security Reforms in the EU and Japan
4. Pension Reforms and the Prospective Outcomes in Germany and Japan
5. Conclusion
The prospect of rapidly aging societies is a historically unique and global phenomenon. By 2050, for the first time in human history the number of old people will outnumber the number of young people. The effects of low birth rates in combination with longer life expectancies are already evident in the developed countries today. The combined effects of this demographic process are particularly noticeable in the Japanese and German societies. Moreover, these demographic trends resemble a particularly severe challenge to the social welfare state in both countries that share a common heritage in regard to their social insurance based Bismarckian welfare institutions. This paper aims to assess the scope for social policy reforms in regard to old age. Thereby, co-ordination of state, family, private and voluntary sector in producing the welfare of older people is seen as critical to ensure adequate welfare production concerning intergenerational equity and social solidarity.
The paper examines the process of old-age policy-making in the two industrial societies. In a case examination of social policy reform proposals and debates on social security, pensions, health care and long-term care (i.e. the protective welfare perspective) in Japan and Germany will be discussed. The paper also evaluates how both countries have established, and are likely to reform, their welfare systems in the light of these developments. OECD data can be used to support those arguments. Following that, resulting challenges from the productive welfare perspective will also be included. The initial question of who will be paying for older people’s welfare in the future is being re-phrased to ask for the responsibility of all societal actors involved – individual, state, commercial enterprises, and the voluntary sector. While policy making predominantly involves a paradigm shift, this paper critically explores the extent to which the implementation of such policies is comparable in both countries.
The first section of the paper examines Section 2 will review the current debates of social policy reform in the two countries. In a third section pension reforms and their prospective outcomes will be discussed. The paper concludes that old age policy and the socio-economic welfare of older people is not always directly linked and, thus, should not be over-stated to achieve intergenerational equity and social solidarity.

3. 2. The Role of Social Policy Measures for Sustaining the Welfare of Old Aged People
Issues of the Co-ordination of
1) Pensions and Employment
2) Health and Social Care
to Establish Social Policies for the Old Age Protection by Several Sectors

4. 3. The Current Debates of Social Policy Reforms in the EU and Japan
Role of Public Pensions
Pension Crisis?
Ageing Populations
Any strategy? In the Reforms of Pensions in the EU

5. The Proportions of Older People

6. 3.1 Challenges to Policies on Ageing:
- Pressures on Pension Systems – Political Disagreement over Pension Debate
- Challenges:
Ageing of the Workforce
Growing Need for Social Care and Health Care
Establishment of the Common Ground of Protection for Old Aged Persons (Citizenship)
Complication of Reforms in Ideology and Strategy

7. 3.2 Social Security and Pension Policy Reform: Directions to Sustain the Current PAYG System
Option 1: Raising Contribution Rates
Option 2: Reducing Pension Benefits
Option 3: Raising Employment Rates
Option 4: Raising Retirement Ages

8. 3.3 Social Security Reform: 1) Raising the Legal Retirement Age
Eight Member States: Austria, Germany, Greece, Italy, France (by raising the number of contribution years), Portugal, Sweden and the U.K.
Most countries are introducing greater flexibility in the age of retirement (except Greece, Ireland, the Netherlands, Portugal and the U.K.)

9. 3.3 Social Security Reform: 2)The Combination of Pension and Income from Work
Measures to restrict the pension formula
The common reform:
the Extension of the Contribution Period for Pensions by tying the amount of the pension to the length of contribution (Italy and Sweden, to some extent Austria, France, Finland, Denmark, Germany, Portugal, Spain and the U.K. )

10. 3.3 Social Security Reform: 3) Income Testing and Ways of Financing Pensions
In some northern countries (Denmark and Finland) new forms of income testing have been introduced on the cumulative total of methods of financing pensions – to reduce the role of contributions, while increasing that of taxes (Portugal and Spain) and, by adding a funded element (Finland, Sweden, and Italy)

11. 3.3 Social Security Reform: 4) Curtailment of Pre- and early Retirement Policies
Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands and Spain

12. 3.3 Social Security Reform: 5) Reductions in the Level of Pension
by means of changes in the methods of calculation by price-indexation instead of wage-indexation (so, virtually wage indexation has been abolished or substantially reduced )

13. 3.3 Social Security Reform: 6) Move to a More Mixed Pension System
Especially in southern Europe governments are trying to reduce reliance on the first pillar (compulsory public schemes) by stimulating supplementary ones, both occupational and private, as a way of introducing elements of funded financing in parallel with pay-as-you-go (PAYG)

14. 4. Social Security and Pension Reforms and the Prospective Outcomes in Germany and Japan
- There are common phenomena in social security and pension reforms in Germany and Japan (even in France and Italy):
Features of the Bismarckian welfare institutions
Co-ordination of state, family, private and voluntary sector in producing the welfare of older people in co-ordination with other social policy areas (Health and Social Care)

15. - Prospective Outcomes?
To ensure inter-generational solidarity
To relate reform proposals to policies on social security, pensions, health care and long-term care (i.e. the protective welfare perspective)
plus
Employment Policy (i.e. the productive welfare perspective)

16. 4.1 The Case of Germany The Beginnings of Social Insurance
SI 'invented' in Germany in late 19th century:
1883 Health Care Insurance
1884 Occupational Accident Insurance
1889 Pension Insurance
1927 Unemployment Insurance
1995 Long-term Care Insurance
Andreas, please fill in something about German Reform!

17. Characteristics of Multi-Pillar Pension Policy Scheme
1st tier = Statutory pension scheme (SI) for blue-/white-collar workers
- earnings-related, defined benefit type
- funded by contributions (PAYG), employer/employee on equal parts
- claims accumulated on individual accounts
- takes into account all earnings of a life-time
- entitlement in case of old age, disability, death of spouse
• covers about 70 per cent of all expenditure for old-age security, i.e. 10 per cent of GNP (Schmähl 2002)
Germany has one of the oldest public pension schemes in the world.

18. Characteristics of Multi-Pillar Pension Policy Scheme (II)
2nd tier = Supplementary Occupational Pension
- all public sector workers are covered by uniform occupational scheme (collective agreement)
- voluntary in private sector – only about half of private sector employees covered (Schmähl 1997)
3rd tier = Private Savings and Insurances for Old Age
- voluntary
- difficult to give accurate estimate of savings for old age

19. Background of Pension Reform
• Demographic development
 dependency ratios years old (1990: 21% 2002: 25%) (Gerostat 2003)
• Past success and much of today’s trouble caused by post-war Pension Reform Act in 1957
 dynamic pensions , i.e. pensions linked to development of gross earnings
• equal SI contributions by employees/employers seen as obstacle to competitiveness of German enterprises

20. Pension reforms during 1990s
1992 Pension Reform Act
motivated by rapid societal ageing as shown in demographic scenarios (passed in 1989, i.e. before German unification)
Major changes:
(a) pensions linked to aver. net earnings rather than gross earnings
(b) aimed at postponing retirement age
- since introduction of ‚flexible retirement age‘ in 1972 many Germans have retired well before reference retirement age of 65 years
(c) new formula for calculation of federal grants to stabilise pension expenditure
- despite heavy reliance on insurance principle some tax money used for re-distribution (covering periods of childcare, education, etc.)

21. Pension reforms during 1990s (2)
Increase of reference retirement age for women and unemployed (1997)
• Reference retirement age for women and older unemployed people was 60 – not 65 years, as for men
reference retirement age for older unemployed stepwise increased to 63 years by 1999
 further increase to 65 by 2001, otherwise deductions
reference retirement age for women increased to 65 years by 2004
• Introduction of ‚part-time employment‘ for workers aged 55+ (combination of part-time pension (60) with part-time employment)

22. Pension reforms during 1990s (3)
1999 Pension Reform Act
- Main difference to previous Pension Acts was change in public climate (rising awareness of „demographic time bomb“)
- Societal background: Germany moving towards economic recession, numbers in registered unemployment approaching 4.5 million, massive public spending deficit (Maastricht criteria)
- increasing tensions trade unions vs. employers
• Main innovation: Demographic factor in pension formula
reduction of standard pension from 70% of average net earnings to 64% in 2030
this is based on assumption of 45 years contribution record – thus only 50% of male and a mere 5% of female OAP qualify

23. Year Background Main Reform Measure 1992 (1989)
Rapid societal ageing shown in demographic scenarios
Pensions now linked to average NET earnings
1997
Massive increase in early retirement
- firms lay off older workers early retirem.
Stepwise raising reference retirement age
(a) Older unemployed
6063 (1999) ; 6365 (2001)
(b) Women 6065 (2004)
1999
Public awareness of “demographic timebomb”
4.5 million unemployed
Introduction of ”demographic factor” to pension calculation formula
pensions level reduced 70%64% (2030)
2001
Crisis of pension funds
Introduction of a 4th tier to pension scheme “Riester-Pension”: a tax-free, state subsidised private pension insurance
2003
Economic recession
Expert commission recommends to increase reference retirement age to 67

24. Return of poverty in old age?
2001 Pension Reform Act
• Introduction of a fourth tier:
So-called “Riester-Pension” (named after the Federal Minister for Labour and Social Affairs)
tax-privileged and publicly subsidised private old-age pensions
so far it is voluntarily
contribution rate is fixed, to increase from 1% to 4% of average net earnings
• commitment that contributions to pension insurance must not exceed 22% in 2030

25. Return of poverty in old age?
2003: Report by Expert Commission
“Rürup-Kommission”
Intention to provide policy makers with recommendations on social security reform (mainly pension, health care, LTC insurances)
• Main recommendation in regard to pensions:
Raise statutory retirement age to 67 years
- seen as in-line with rising life expectency
- critics argue that many (especially poorly qualified) will become unemployed instead

26. Return of poverty in old age?
OUTLOOK – What will German Pensions Scheme of the Future look like?
Combination of PAYG, social insurance scheme + private, capitalised pension insurance schemes
SI will move towards “basic pension” at social assistance level – supplemented by occupational + private pension schemes
Raise in reference retirement age will come
Higher flexibility (those who wish to work until 70+ will do so)
We will see higher degree of social cleavages in old age.

27. 4.2 The Case of Japan Social Security Policy Imperatives:
1) Demography
2) Adequacy of the Current Benefit Level
3) Sustainability

28. Change of Japan’s Ageing and Population Projections

29. Considerations over Policy Actions in Social Security and Pension
Its coordination, in terms of financial arrangement, with Social Policy Reforms in Health and Long-Term Care
How equal should it be?
Policy making for Inter-generational Solidarity
Integration of Ageing Related Policies to Create a Life-time Saving System

30. Old-Age Dependency Ratios (U.N. World Population)
Japan’s Potential Support Ratios with 5 Scenarios
Source: U.N. Population Division 2000. 33 36 43 41 47
2025 21 27 28 25 20
2000
U.S.
U.K.
Italy
Germany
France
Canada
Japan
4.77
2.19
2.07
1.71
2050
2.59
2.35
2.24
2025
4.03
3.99
2000
Constant Ratio 15-64/65 Years or Older
Constant age Group 15-64
Constant total Population
Medium Variant with Zero Migration
Medium Variant

31. Issues of Social Security Reforms in Japan
1) Broadly, as Public Social Expenditures have increased, it is necessary to tackle ageing issues through a series of related social policy reforms, i.e. on Pensions, Health Care and Long-Term Care.
2) To be more focused on ageing issue, the discussion is about
(1) how to cope with the rise of social protection expenditure?
(2) to what extent should benefits be cut if this is politically feasible?
3) As a whole, are expenditures cost-effective to meet the most pressing requirements?

32. Policy Imperatives for Social Security Reforms in Japan
Economy and Employment
Environment
GDP growth – 0.46 %
( )
Unemployment Rate 5.03%
(2001)
Public Debt
% of GDP
Central and Local
Government Finance
Borrowings (by Japanese National Bonds)
State JPY 414 Trillion (€ 3.23 Trillion)
Local JPY 109 Trillion (€ 0.85 Trillion)
Rate of Social Protection
/General Expenditure 38.4 %
Demographic Changes
TFR 1.39 (2002) Projected as of 2050
Social Security Reforms
1) Pensions,
2) Health Care,
3) Long-Term Care
and
4) Employment
Policy

33. Features of Japan’s Social Protection System
Universal Health Care Insurance, Pension and Long-Term Care Insurance
Japan’s Social Protection System is financed by Social Insurance (61%) and Tax (28%).
health care, long-term care, public pension, employment and work-related accidents are partially covered by social insurance.
The ideology concerns:
1) sharing the risk among insured persons, and
2) Re-distributing income among people

34. The Advantages of Social Insurance lie in:
1) Compulsory membership
2) Specific contract with two advantages
A. protection can be given against risks that the private market cannot insure.
B. the risks can change over time. Thus, in sharpest contract with actuarial insurance, social insurance can cope with not only with risk but with uncertainty.
3) The Bismarckian tradition same as the Continental Europe?

35. Japan’s Pension System
PAYG system: Three Pillars (Multi-Pillars)
Universality of the Basic Pension
Mixture of Public and Private Schemes
1st pillar: the Basic Pension
2nd pillar: the Employees' Pension Insurance, National Pension Funds, Mutual Funds
3rd pillar: Individual-based DC pensions (paid by Individuals); Corporation Pensions (DB) plus
Corporation-based DC Pensions (paid by employers)

36. Japan’s Pension Schemes

37. Current Issues in Social Security and Pensions
Financial Problem with Public Pension
Non-Compliance and High Drop-out from the Basic Pension Scheme
Financial Pressure on Enterprises
Extension of Defined Contribution Pension Scheme to some other parts?
Pension Fund Investment: successful?

38. Policy Choices for Pensions
Benefit Cuts?
There have been various questions of how to cut net pension benefits, including through
1) Reductions in the gross replacement rate (59% to 50%),
2) Higher taxation of pension incomes,
3) An increase in the retirement age, and
4) A shift to privately financed pension schemes
Higher Government Transfers?
Maintaining high benefits at lower contribution rates would require an increase in government transfers via the social security system
Or, To transform from PAYG schemes to
a Partially Funded System to accumulate Funds?

39. Pension Reforms
There are three policy options that have already been implemented, i.e.
Cutting Benefits
(1) Cutting Pension Benefits by 0.9% from April 2003 onwards
Higher Government Transfers
Raising the Retirement Age to 65
Raising Consumption Tax by 3 – 5%
System Change
Introducing DC pensions (2002)
Transforming to a Partially Funded System
to achieve Actuarial Fairness

40. Prospective Pension Policy Changes (2004)
Switching to a Notional Defined-Contribution (NDC) Plan such as in Sweden?
Partially Funding Shift to a Consumption-Based Tax
Possibility of Reducing Benefits
Shift to Income-Related Contributions for Non-Employees
Extension of the Coverage of Part-Time Employees

41. Current Issues in Pensions
Sustainability of PAYG Public Pension
Non-Participation and High Drop-Out from the Basic Pension Scheme
Financial Pressure on Firms?
Extension of Defined Contribution (DC) Pension Scheme to some other parts?
Pension guarantee and fund issues in a global context Who is responsible for your retirement?

42. The 2004 Pension Reform
Choice of Cutting Benefits, Higher Government Transfers, or System Change
Various ideas on Prospective Pension Reform:
The Elder Representative Group: Replacement Rate 59%; Contribution Rate 26%
The Japan Federation of Economic Organisations: Replacement Rate 36%; Contribution Rate 13.58%
The Ruling Party (LDP and the Komei Party) Replacement Rate 50%; Contribution 18.3%
The Opposition Party (DPJ)
Replacement Rate 50%; Contribution 13.58% + Consumption Tax Rise 3%

43. The Overview of the 2004 Reform
1. Employees’ Pension Insurance Rise
from 13.58% (2004) to 18.3% (2017)
0.354 % rising-up every year
2. Introduction of the New Indexation (till 2023)
New Indexation = Consumer Price Index - 0.9%
The Content of 0.9 %= 0.3% (the Rate of Increase as an Extension of Life Expectancy) + 0.6% (the Pace of Decrease as Labour Force Down)
3. Income Replacement Rate
59% (2004) > 50% (2023)

44. 5. Conclusion Direction of the Reforms: Status Quo (Bonoli, 1999)
Pension Capitalism (Clark, 2001)
A Paradigm Shift (Schmähl, 2002)
are not linked to
Inter-generational solidarity

45. Who Will Pay for Our Old Age?
So,
Who Will Pay for Our Old Age?
This research has shown that, albeit with much efforts, policy reform and the socio-economic welfare of older people is not always directly linked. Therefore, it should not be over-stated to achieve inter-generational equity and social solidarity. Indeed, we need further our exploration of the availability and applicability as to Who Will Pay for Our Old Age?

46. Contact details: Email: tetsuo.ogawa@diplomats.com Dr Tetsuo Ogawa
Oxford Institute of Ageing
University of Oxford
3rd Floor Manor Road,
Oxford OX1 3UQ,
U.K.
Tel:+44(0) Fax:+44(0) Wed site: