Mostly Kokumin Nenkin
Today we have another riveting nenkin case study for you. This time it is an example of someone who has mainly paid into kokumin nenkin (the basic pension) rather than kosei nenkin (the ‘salaryman’ pension).
The person kindly shared their nenkin annual statement (年金定期便) with me, so we’ll just go through the numbers and what they mean.
A total of 415 months contributed to kokumin nenkin, of which 235 were free from being a dependent spouse. The other 173 months were paid.
They also have seven months of payments into kosei nenkin for a total of 415 months contributed. You get a full pension after 480 months of contributions (40 full years), so hopefully this person will get close to full contributions in the end.
Finally at the bottom we can see projected pension from age 65. This number is based on contributions so far and continuing to pay in until age 60. It is broken down into the basic old age pension (716,791 yen) and kosei nenkin (just over 18,000 yen). The 735,495 amount is the annual pension, so this person will only receive around 60,000 yen a month.
In fact, because kaigo hoken (disability insurance) is deducted, I would guess they’ll actually get closer to 50,000 yen a month (100,000 yen every two months, which is how nenkin is paid).
One thing that isn’t clear is whether fuka nenkin is included in these figures. I suspect it might not be, in which case the eventual pension would be slightly larger.
I recommend deferring pensions in order to get a larger amount if you are financially able to do so. Not taking the pension until the age of 70 increases it by 42%, and deferring it to 75 will increase it by 84%. If you can afford to do so, this is generally a good idea as a regular payment from the government becomes more valuable if you become unable to manage your finances.
For this person, deferring to 70 could increase their monthly pension to 80,000 yen or so, and waiting until 75 could take it to 110,000 yen or so.
As a return on investment, nenkin is a good deal. Having paid in 1.6 million so far, and possibly another 1.2m or so by age 60, our contributor will get 730,000 yen+ per year as long as they are alive. Those contributions were also tax-deductible.
That is a yield of over 25%, albeit on a small amount of money. It is just not possible to buy this kind of annuity from a company and a good reason to make sure you and your family are paying into nenkin and any other pensions you are eligible for.
You can also see my latest pension statement here for what a kosei nenkin heavy pension record looks like.
(of course, a lot of the cheapness comes from the in my opinion unfair treatment dependent spouses receive, as they get full kokumin nenkin enrolment without paying for it)
How about you? Are you aware of your projected nenkin numbers?
Hey, Ben: Two things, one on topic ; and one off. 1) Are our nenkin records accessible online or do we have to go to the shiyakushou (or wait for an annual mailing)?
2. Tried twice to buy your ideco text through paypal. The Gumroad page would never get beyond “processing…”. Should I wait and try again later? (But given my age, can’t wait too much longer.)
Hi Ron
Thanks! You can make an account on the nenkin website and see all your records online: https://www.nenkin.go.jp/n_net/
Don’t recommend going to the ward office -go straight to the source and call or visit the pension office.
Sorry to hear you had trouble with Gumroad -it can be temperamental at times. I had the same problem myself once trying to buy someone else’s book, but closing the browser and trying again fixed it that time. Let me know if you continue having problems!
Hi Ben,
I’m wondering how you calculated the yield of 25%. Doesn’t the yield depend on how long the person lives after beginning to collect nenkin? If they die before collecting as much as they contributed, the yield is negative. And the longer they live after “breaking even,” the higher the yield.
In the article I am thinking of nenkin as a kind of annuity (probably the closest comparable thing). For a simple annuity, you pay an insurance company a lump sum and they then pay you an income in return. The yield would be the amount they pay you. Recently this is very low (low single digits).
For this example of nenkin, the person will end up paying 2.8m yen into the system, and then receive an annual pension of 700,000+ yen. An incredible deal!
Apart from the legal obligation to pay them, I think we should think about pensions differently when comparing them to other investments: https://www.retirejapan.com/blog/pensions-are-not-investments/
Thank you, Ben. I see how you got that number now.
Yes, nenkin is similar to an annuity. But if the yield calculation is based on the annuity purchase price, it would be more meaningful to count the working spouse’s contribution and the working spouse’s employer’s contributions as part of the purchase price–and then both spouses’ pensions as the benefit. The yield would be a lot lower than 25%. Calculated your way, a spouse who was a dependent for 40 years would have a full pension for free with a yield approaching infinity!
The actionable part of this under current law is for one spouse to consider keeping their income below the threshold for maintaining dependent status. It goes against the government’s stated policy of fuller work-force participation, but until the laws change, some people will be financially motivated not to work full time.
Oh, I loathe the dependent spouse free pension system. I think it is deeply unfair.
But it is not paid for by the working spouse or the employer. It is just free (the worker/employer pay the same regardless of whether or not there is a dependent spouse).
My take is that if a family can afford to have a non-working spouse, they can afford to pay kokumin nenkin for them -after all, single parents and the working poor don’t get that kind of perk.
Two points to make:
1) Fuka nenkin amounts are included in the reports received from the Japan Pension Service.
2) The dependent-spouse pension is problematic and has become outdated, but it should be recognized that the intent was to provide for the welfare of the unemployed and underemployed. This is why income limits were imposed (individuals with incomes of over 1.3 million yen are not eligible). Divorced spouses are also ineligible for coverage (although they don’t lose credit for the periods they were eligible). The fact that the incomes of full-time company employees rely upon the contributions made by their spouses was an important factor: employee incomes were considered a joint effort, which is actually a rather progressive stance to take. With the institution of Category 3, participation in the National Pension system became mandatory even for those who had hitherto not been required to join — a step toward universal coverage. It is also the case that at the time Category 3 was instituted (1986), insurance premiums for Category 2 individuals were raised from 10.6% of salary to 12.4% of salary, so it isn’t accurate to say that the pension comes completely free of charge.
Still, unfairness rightly became an issue, even though the government’s true interest was probably focused on funding rather than fairness. In any case, by 2014 a working group at the Ministry of Health, Labour and Welfare reported that members had raised no objections to eliminating the dependent-spouse category. The expansion of the kosei nenkin system that was undertaken in 2016 was in fact predicated, at least in part, on the eventual elimination of the category. But otherwise progress has been slow because of the connection with the problem of how to provide social-welfare benefits to the unemployed/underemployed, who are unlikely to vanish from the face of the earth.
The best concise overview of the issue I have come across in Japanese, explaining both pros and cons and containing links to relevant government documents, is here (I am basically summarizing the information on that page):
https://hoken-room.jp/money-life/7443
Maybe not enough to assuage the dissatisfaction of the FIRE Otaku from Sendai, but part of the relevant 経緯.
Thanks! With this level of detail, you should be writing the blog posts ^-^
Good to hear that fuka nenkin is included, but it doesn’t seem to be broken out or listed in any way, which is a bit disappointing (how can we check if we are actually getting it?).
The reason I believe the dependent spouse kokumin nenkin is ‘free’ is because there is no difference in what I (with a working spouse) or my non-married colleagues pay, and what someone who is married with a dependent spouse pays. In practice, the dependent spouse gets a free ride regardless of need.
Great link though, and good to hear that I am not the only person that thinks this way.
The Japan Pension Service says (https://www.nenkin.go.jp/n_net/n_net/confirmation.html) that the amount of fuka nenkin premiums paid in can be checked on Nenkin Net, but since I was never covered by kokumin nenkin, I don’t know what form that might take. Someone else will have to check on that.
The pension office can apparently give you a breakdown, at least regarding what has been paid in. The number of months paid as fuka nenkin will also be listed in the notification you get when you actually start receiving your your pension (and subsequent annual notifications) — the nenkin kettei tsuchisho/henkosho 年金決定通知書 — not much help for the younger set, I guess.
You could probably do the calculations yourself to determine how much is actually attributable to fuka nenkin: 400 yen number of months paid in total amount reported as paid; 200 yen number of months paid in reported estimated pension.
This is the JPS page with the curt statement that fuka nenkin payments are included in the toal reported in the nenkin teikibin:
https://www.nenkin.go.jp/faq/nteikibin/teikibinkisainaiyo/nofugaku/20140509-01.html
The symbols I used apparently messed up the formulas. Maybe this will work:
400 yen [times] number of months paid [subtracted from] total amount reported as paid for incoming; 200 yen [times] number of months paid in [subtracted from] reported estimated pension for outgoing.
How did this person manage to only pay 1.6 million so far with 173 months of 第1号被保険者 paid (+ 7 months of kosei nenkin)?
Maybe I am missing something?
I will need to check again (the photo cut that bit off) but I think it is actually more like 1.8m now. The 1.6m figure was from last year.
Timely topic. Yesterday my husband, 68 1/2 years old and retired, went to apply for his kokumin nenkin. He has provided me with some figures. If he had started collecting at age 65, he would have received 780,000 yen per year. He will start collecting from April and will receive 1,010,000 yen per year. We have had quite a debate about the best age for him to start receiving. Because he has some health issues, he decided that now was a good time to start. If he lives 11 years longer, he will break even with collecting from age 65.
Husband looked up the figures for me: For men, 8% start collecting earlier than age 65, 90.4% start at age 65, and 1.5% delay collecting beyond age 65. For women, the numbers are 14.8% early, 84.2% at age 65, and 1.1% delay.
We decided to think of the national pension as a kind of insurance – a certain amount of income will be coming in for the rest of our lives (yes, we know about the “But will the system hold up?” arguments) instead of a “Did we get all our money back early? savings plan. We purchase fire insurance for our home, but we don’t expect to get our money back – and are actually happy if we don’t because that means the house hasn’t burned down. (We actually did collect the total amount of retiling the roof when part of it was damaged in a typhoon three years ago.)
I started collecting my kokumin nenkin at age 65 but am delaying collecting other private pensions that have a increased rate of return the longer I wait. I don’t think the terms are the same now, but the post office Kanpo pension plan that I purchased in the 90s pays out an additional 3% every year for the rest of my life. Over the years, family and friends have told me that they were getting better interest on stocks, bonds, etc., (and I have some), but, having observed my parents and my parents-in-law, a steady amount of income coming in every month is quite reassuring to elderly people who get panicked when they see the total amount of their savings steadily dropping.
Completely agree with treating state pensions as an income floor and deferring as long as possible to maximise them. Don’t want to be dealing with a complicated stock portfolio in my 90s!