Social Security in Japan

Toward a Japanese Model of the Welfare State

Social Security System in Japan

Historical Background

The origin of social security dates as far back as the poor law in England (1601). In Japan, an equivalent law (Jyukkyu Kisoku) was introduced in 1874. Another important origin of social security is the social insurance system introduced by Otto Bismarck in Germany in the 1870s. In Japan, the first social insurance was the health insurance system that was introduced in 1922. The pension system for workers was introduced in 1941. The Ministry of Health and Welfare was founded in 1938.

Development of universal social security began after the end of World WarII. The new Constitutional Law (1947) states that all Japanese people have the right to enjoy the minimum standard of living and decent life. The Government Council on Social Security was established and in 1950 the council advised the establishment of universal social security system. A new public assistance law was enacted in 1950, following the Child Welfare Law (1947) and Welfare Law for the Handicapped (1949), before the Social Service Law (1951). In the 1960s, the social security system aimed for "from selectivism to universalism" and "from relief to prevention." The pension and health insurance systems were reformed and the new systems were implemented in 1961. Since then national pension and national health insurance systems cover all Japanese.

Social Security System in Japan

The Social Security Council classifies the Japanese social security system as Table 2 shows.

Main social security systems and expenditure can be divided into following categories.

The total social security benefits (note2) in 1994 were about ¥70 trillion, the equivalent of 16.3% of the national income. The pension benefits were the largest item and the medical service costs the second (See statistical data in Appendix). These two items of expenditures (benefits) in 1997 amount to more than 95% of the total social security benefits. The proportion of other expenditures, such as personal social services and family policy, are estimated to become higher in future.

Pension System

The employees pension and a part of the self-employed pension have double-decker systems; namely, on top of the national basic pension that covers all Japanese, income-related benefits are supplemented (See Chart 15). The basic pension in 1996 was ¥65,500 per month when fully matured. The average amount of actually paid basic pension in 1994 was ¥43,000 per month. Including income-related supplementary pension, the average amount of employees pension actually paid in 1995 was around ¥170,000 per month. When fully matured, the total amount of employee's public pension including his or her spousee's basic pension is around ¥240 ,000 per month at present prices. The pension benefits are indexed every year to consumer prices. Besides, every five years they are indexed to the real wage net of pension insurance premium increase (note3). Retired employees of large companies and the public sector receive occupational pensions on top of the double-decker public pension and/or retirement lump sum money. About one-half of all employees receive either occupational pension and/or retirement lump sum money. Private pensions and life insurance are well developed in Japan. Including these savings, the total amount of Japanese elderly people is nearly twice of that of workers.

One-third of the cost of national basic pension is financed by tax and the rest by insurance premiums. The income-related employees pension is financed by the social insurance premiums and revenues of pension funds. Social insurance premiums are shared by employees and employers on a fifty-fifty basis. Social insurance premiums are based on income and income-related with an upper limit. The social insurance premium of employees pension including the premium for their and their spouses' national basic pension is 17.5 % of regularly paid wages (note4) in 1997. The premium of employees pension, including their own and their spouses' national basic pension, is 17.35 % in 1997. The premium will increase as the population aging and maturing of the pension proceed. The government estimates that the premium will be 29.5% in 2025 assuming that the elderly ratio becomes 25.8 %. If the ratio becomes 28 %, the premium will be higher.

The total amount of public pension benefits was 8.3% of the national income in 1994. In the same year, 51.3% of the total social security benefits was for public pension benefits. The total public pension funds amounted to about ¥150 trillion, which corresponded to more than 30% of GDP. Most of the funds are managed by the Ministry of Finance. How to manage this huge fund is under discussion now. There is a good possibility that the management of a larger part of the funds would be entrusted to private financial organizations.

Health Services

The second largest item of social security benefits is medical insurance. The total amount of medical costs in 1995 was ¥27 trillion, 7.3% of the national income. Of those 88%-89% were paid by tax and health insurance funds, and the rest was paid directly by patients and their families. The replacement ratio of sickness payment during sick leave and unemployment payment is 60% of the wages of the employee.

The Japanese health care system is characterized by universal coverage, free choice of health care providers by patients and fee-for-service practice. Until recently, division of hospital and pharmacy was exceptional. Hospital and clinic physicians sold drugs and patients usually bought medicine at hospitals and clinics. In 1994, only 18.1% of medicines prescribed at hospitals and clinics were sold at pharmacies, though the proportion is increasing. The costs of medical services are shared by the central and local governments, social insurance premiums and patients' fees.

Japanese health care system is divided into three systems (See Table 2). They are (a) employees health insurance, (b) health insurance for the self-employed and (c) health services for the elderly. The patients' fee (out-of-pocket payments) is 12% of the total costs. The costs of (c) are financed by the central and local governments, and the funds of (a) and (b). Health services for the elderly (c) are most generous and patients' fee is the smallest. Employees' out-of-pocket payments are 10% of medical costs, while out-of-pocket payments of the self-employed are 30%. For all health services, the patients' fee has an upper limit. The limit is 63,600 yen per month. The Government intends to raise patients' fees payable by employees to 20% of the medical costs in order to narrow the differentials in the out-of-pocket payment ratios. This reform is expected to moderate the expansion of medical costs at the same time.

Another reform that the government intends eill change the fee-for-service practice. This system is effective to stimulate physicians to work hard, but sometimes induce them to use too much medicine and patients to stay at hospital. The percentage ratio of the costs of medicine in Japan is exceptionally high, about 30% of the total health service and medical costs. The average length of hospitalization is much longer than that of other highly industrialized countries. To cope with these difficulties the government intends to 1) mix the fee-for-service practice with fixed-rate practice ; 2) promote the division of hospital and pharmacy; and 3) integrate health services with personal social services for the elderly.

Personal Social Services

The public pension and medical insurance systems are universal and comprehensive in Japan. However, there are two relatively backward fields in social security. They are personal social services for the elderly and the disabled, and family policy to support working women. In "Welfare Vision Towards the 21st Century," published in 1994, the government placed a high priority on improving personal social services for the elderly and increasing child-raising support.

The "Golden Plan for the Elderly" and "Angel Plan" to support working women were introduced as priority social policies towards the 21st century. In order to realize these plans effectively, the government intends to introduce a social insurance system for nursing services (including intensive care) to finance the expanding costs of those services.

If the nursing social insurance system is introduced, 10% of the costs of nursing and care services will be paid by the recipient of services, half of the rest will be financed by taxes, the remainder will be paid by nursing service insurance (See Chart 16). The nursing service insurance will cover not only public services but also private provision of services. Cash payment to care-givers at home is not included in the present government plan, but in future nursing service insurance will cover domicile care for the elderly.

There has been heated debate in Japan on how to reform nursing services for the elderly and their cost financing. The government intends to introduce a social insurance system to finance half of the service costs. Those who support a social insurance system insist that if social insurance is introduced, three benefits will accrue: nursing services will be provided on the principle of universalism; provision of services by private and informal organizations will be promoted; and the tax burden will be reduced. Besides, as the medical services in Japan have been financed by the social insurance system, it will be easier to integrate medical services and personal social services for the elderly, if both health services and personal social services introduce a social insurance system.

Main systems of nursing services are classified into three types; Scandinavian type, German type and the U.S. type as Table 5 shows. The present personal social services, including nursing services are financed by taxes but still limited and selective. In this respect, they may be classified as B in Table 5, though a large portion of the services are provided by semi-public organizations. In contrast, in Scandinavian countries, the costs of personal social services and most of health services are financed through taxes, and these services are mainly provided by governments (type A in Table 1).

In Japan, nursing services as personal social services are provided by local governments and authorized non-profit organizations. The costs of services excluding recipient fees are financed by taxes. The central government subsidizes half of the costs and local governments pay the rest. The recipients of personal social services, however, are limited. Less than 2% of the elderly population live in nursing facilities or service (sheltered) housing. Those who receive home-help services as social services are even more limited in present Japan (type B in Table 4).

Thanks to family support, the costs of personal social services have been smaller than those of European countries. But it is becoming more and more difficult to rely too much on families and informal sectors. The government intends to expand and reform the present personal social service system into a universal and mixed system as Chart 16 and D in Table 4 indicate. Though some experts call for reform of the present system a la Scandinavian model (A in Table 4), it is more likely that Japanese nursing services will be reformed into a mixed or plural system.

Family Policy

Family policy to support working women who have child or children is another underdeveloped field of social security in Japan. The Government decided to develop this policy and named it "Angel Plan."

In Japan, the labor participation of woman in the non-self-employed sector is increasing and the proportion of female employees to the total employees has an upward trend as Chart 17 indicates, though it declines somewhat when the economic growth rate falls. The ratio increased from 30.7% in 1960 to 38.8% in 1985.

Three motives stimulated the development of family policy for working women. The first motive was the promotion of equal opportunity and equal treatment for female workers. Opinion surveys suggest that one of the most undesirable social practices is differential treatment at the workplace and employment (See, for example, Japan Productivity Center for Social and Economic, Development, 1996).

The second motive was a labor shortage around 1990.

The third was the declining trend of fertility rates in Japan.

The second motive has become less conspicuous because of a prolonged recession, but the third one has become more urgent. As Chart 18 indicates, the total fertility rate has been declining since 1967. 1966 was exceptional. It was the Year of Hinoeuma Fiery Horse. The old superstition says that women born in the Year of Hinoeuma are not suitable as wives. It is of interest to note that superstition still has some influence on actual human behavior.

As to the causes of the declining fertility rate, there have been various views. But it seems that the increasing population of working women is one possible reason.

Charts 19-20 which are made based on annual data of 1960-95 suggest that the ratio of female employees is positively correlated with the age of first marriage of women, and the age of marriage is negatively correlated with the total fertility rate. If this conjecture is correct and if these relations do not change, the total fertility rate will decline further, for the labor participation ratio of women is expected to increase. However, these relationships are not inevitable.

The experience in Sweden suggests that active family policy may be helpful to coincide the increase of labor participation ratio with recovery of fertility rate.

Based on these arguments, the Equal Employment Opportunity Act and maternity leave with income compensation for female employees were introduced in the 1990s. Day-care facilities for children are being reformed to cater for working women. Though the compensation during maternity leave is still low (20% of wages from employment insurance funds and social insurance contribution from employers), they are expected to improve in future.

Employment of Senior Workers

Employment policy to encourage older workers is another example of productive welfare policy (note5). If older workers are encouraged to participate in the labour market through policies like government subsidies, their contribution to GDP will be greater than the costs of the government subsidies. If the employed older workers pay tax and social insurance contributions, there is a good possibility that tax revenue from them will exceed the costs of employment subsidies. For example, formula (5) suggests that as long as the amount of government subsidy is smaller than the increase of government revenue caused by the increase of senior workers, government subsidy will improve the net government revenue, instead of straining it.

Public Assistance

Public assistance is the last safety net to save those who cannot be saved by preventive social security. The number of them is less than 1% of the total population and the total benefits are around 0.4% of the national income.

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