The Public Pension
Justification of the Public Pension
The Public Pension System
The public pension plays an important role in aging developed countries, including Japan. The government collects a significant amount of contributions from the working generation and pays a great deal of benefits to the elderly generation. This chapter investigates the economic effect of the public pension and discusses desirable reforms in an aging society.
The financing methods of the public pension are twofold: the pay-as-you-go system and the fully funded system. In the fully funded system, young people save by themselves; when they are old, they receive returns and savings in order to finance their living costs. If an individual dies at an earlier age than the average, the rest of her or his saving is distributed to other people of the same generation. In this sense, risk-sharing works among those who die early and those who live for a long time within the same generation; however, the balance of the overall pensions is closed within the same generation so that there are no intergenerational transfers.
With the pay-as-you-go system, the current working generation pays pension contributions. The government transfers these to the current elderly generation as pension benefits. There are no funding assets and no intergenerational transfers. In Japan, the public pension is called the modified funded (or modified pay-as-you-go) system. This is very similar to the pay-as-you-go system but still has some funding assets.