Reader Case Study: Not the best option for most, but a good option for some people
A reader contacted me and asked me to explain kokumin nenkin kikin. They have been paying in for 22 years (spouse signed them up originally) and they were wondering what exactly the statement and projections meant.
We wrote about kokumin nenkin kikin a few years ago, but didn’t really understand it very well at the time, and a lot of that post turned out to be wrong!
To be fair, almost no one in Japan seems to understand this system. It is obscure, confusing, and even the nenkin staff at the ward/city office don’t tend to mention it when people sign up for kokumin nenkin.
Let’s see if we can do a better job (this article has been rewritten thanks to extra information and feedback from the excellent comments).
Our reader’s situation
People paying into kokumin nenkin kikin get an annual statement. Let’s look at some of the relevant sections submitted by our reader.
This table shows the various options. Our reader is paying into type A for their initial ‘block’ and type III for their second ‘block’. They pay the price listed above every month.
This table show the amount of time paid in, and the benefits payable in retirement. Our reader will receive 60,000 yen a year from the age of 60 to the age of 75 (for the type III ‘block’) and 372,800 yen a year from the age of 65 until their death (the type A initial ‘block’).
Type A blocks provide a guaranteed 15 years of pension that can be inherited if the pensioner dies before the age of 80.
What is kokumin nenkin kikin?
Kokumin nenkin kikin is a voluntary supplementary pension for people who are paying kokumin nenkin. If they choose, they can pay in up to 68,000 yen a month and in return will receive extra pensions in retirement based on how much they paid in and what products they chose.
Importantly, this is a defined benefit pension. It will pay out the agreed amount for the agreed timeframe.
This is different to defined contribution pensions (like iDeCo or corporate DC pensions) which will pay out different amounts based on how the investments chosen in the pension perform.
Who can pay into kokumin nenkin kikin?
Only people who are paying kokumin nenkin in full (if you are exempt from paying kokumin nenkin or paying at a reduced rate due to low income, you can’t use kokumin nenkin kikin).
The reason for this is that kokumin nenkin does not pay very much in retirement, so the government wants to encourage/help people to make extra preparations for retirement.
How does kokumin nenkin kikin work?
Paying into kokumin nenkin kikin reduces your taxable income, so can result in lower income and other taxes. The higher your income (and thus the higher your marginal rate of income tax) the more valuable this is.
When you sign up for kokumin nenkin kikin, as in the photos above, you choose what kind of investments to pay into. You can choose to buy ‘blocks’ of investments.
Here is the current lineup:
First, you have to choose to buy an initial A or B block. Both A and B blocks provide you with an annual pension unti you die.
A blocks guarantee your pension for 15 years from age 65, this can be inherited if you die before receiving the full amount. They cost slightly more than B blocks.
B give you the same annual pension as A blocks, but if you die the pension stops and your heirs don’t inherit anything. They cost slightly less than A blocks.
Then, you can choose to buy additional A or B blocks, or I, II, III, IV, or V blocks.
I and II blocks pay a small monthly pension from age 65. I blocks pay for 15 years, and II blocks pay for 10 years.
III, IV, and V blocks pay a small monthly pension from age 60. III blocks pay for 15 years, IV blocks pay for 10 years, and V blocks pay for 5 years.
The cost of each block depends on your gender and your age, so you need to go to the website and use their simulator, or find a nenkin staff member to talk you through it. The fact that this is so complicated really undermines getting people to sign up for it in my opinion.
Who might choose to pay in?
People who are not comfortable using iDeCo to invest in the stock market might find kokumin nenkin kikin more to their liking. The returns are likely to be lower, but it will probably feel safer and is better than nothing.
US citizens are not able to use iDeCo to invest, so kokumin nenkin kikin might be a good way for them to reduce their income taxes and shore up their eventual pension. Another benefit is that paying into a national pension scheme should not involve any kind of reporting to the US government (FATCA, etc.).
What alternatives are there?
The most obvious alternative is iDeCo. For most people iDeCo is going to be a better alternative to kokumin nenkin kikin.
Because they share the same tax allowance, you can do one or both, but your combined monthly contribution cannot be more than 68,000 yen a month.
Fuka nenkin is another option. If you pay into kokumin nenkin kikin you will also automatically pay into fuka nenkin, but you can also do it by itself or alongside iDeCo. Fuka nenkin shares the iDeCo allowance, so if you pay into that your maximum monthly contribution will be 67,000 yen (fuka nenkin costs 400 yen a month but effectively takes up 1,000 yen of the allowance).
Should you sign up for kokumin nenkin kikin?
Maybe. My view on kokumin nenkin kikin is that it is better than doing nothing, but perhaps not as good as paying into iDeCo for most people.
If you are not comfortable investing, or you are a US citizen, or you already invest and you want to diversify, kokumin nenkin kikin might be an option.
Alternatively, if you already have savings and investments, but want to diversify by building up your government pension (which is extremely valuable), this might be a good option.
Kokumin nenkin benefits are set, so there are tables showing how much you need to pay depending on your age and gender, and how much you will receive in pension. This pamphlet has a lot of the information, and you can also ask the pension office/the pension desk at city hall/the ward office to explain your options and run some simulations for you.
There is also an insurance element that pays out if you die before the age of 65, which might be of interest to some people.
Which blocks should you choose?
My feeling is that the A and B blocks are the most valuable. The I, II, III, IV, and V blocks, being time-limited, do not provide you with a guaranteed income until you die, so they don’t have the same advantage compared to iDeCo or just investing normally.
If a guaranteed pension from A or B blocks is the way to go, which should you choose? I guess that depends on whether you have dependents/heirs or not. If you don’t, then you can save about 10% on your contributions by choosing B blocks.
If you do have dependents/heirs, it might be worth paying slightly more for the A blocks in order to ensure that they will get the rest of your benefits should you die before the age of 80.
What about you? Are you using kokumin nenkin kikin? Do you have any questions about the system?
Although implied by the post, it is not explicitly stated that while iDeCo is a private DC pension plan, kokumin nenkin kikin is a public DB pension plan. You can therefore calculate your benefits with certainty, although given the wide variety of enrollment options, calculations may prove complicated.
Note that you are not really choosing what kinds of investments to buy, you are simply choosing how you want to receive your benefits. I believe that the post errs slightly in describing the first mandatory “block,” which must be taken as a lifetime benefit either with or without a minimum 15-year guaranteed period of benefits (these are the “A” and “B” options described above). In other words, both A and B are lifetime-benefit options, with the former payable for a guaranteed minimum of 15 years even if the beneficiary dies before that. Beginning with your second block, you can mix and match among any of the seven available options available, and can also increase or reduce your contributions depending on your needs.
A few more key points :
To be eligible you must be a Category 1 Insured Individual (self-employed, student, unemployed, etc.) between the ages of 20 and 59, or be resident overseas, between the ages of 60 and 64, and voluntarily enrolled in kokumin nenkin.
Once enrolled, you must stay enrolled (contributions can be reduced to a specified minimum). You cannot take an early lump-sum payment for any contributions made during the period of enrollment.
Kokumin nenkin kikin constributions automatically incorporate the fuka nenkin supplement to the National Pension; it is not a separate option.
If you elect to take kokumin nenkin benefits before the age of 65, your kokumin nenkin kikin benefits will be limited to the fuka nenkin equivalent until you reach 65.
If you lose eligibility before contributing for a period of 15 years, you or your survivors will in principle eventually receive your benefits in the form of a lump-sum payment.
As described in the post, contributions are limited to a monthly maximum of 68,000 yen, and this maximum amount is shared with iDeCo and other private DC pension schemes.
As with all things pension, details abound. Here is the direct link to download the official Japanese pamphlet:
https://npfa.or.jp/system/pdf/2851bf7d93da463a33937014e1d282bec5bda574.pdf
Wow, thanks for the incredibly useful comment 🙂
I will rewrite the post this weekend to incorporate your info/corrections.
When you said that the kokumin nenkin kikin system was complicated you weren’t kidding, beginning with two central contradictions. One is the “public” characterization I probably should have been a little more cautious about applying. The pension is voluntary and the enrollee decides how much to contribute, so technically speaking this is actually classified as a private pension system (shiteki nenkin seido) — thus the 68,000 yen monthly contribution limit shared with iDeCo, etc. However, the system is based on the public-pension law, intended to ameliorate the discrepancy between the self-employed and company employees regarding old-age pensions, and it is administered under the general approval of the Minster of Health, Labour and Welfare, so the public-welfare aspect is undeniable. The fact that premiums and the corresponding benefits are fixed once you’ve enrolled (unless you decide to change things yourself) also seems meant to suggest the reassurance of a government-backed plan (even though the government doesn’t administer it directly). The official pamphlet goes so far as to refer to this as a “public personal-pension” system (kōteki na kojin nenkin). Talk about confusing.
The second contradiction is that the main focus is supposedly on providing lifetime pensions (the A or B choice which must be made for the first mandatory “block” of a subscription), but provision is made for five different types of optional fixed-term pensions (categories I-V), and enrollees are encouraged to enroll in the combination of seven categories that best suits their plans and individual circumstances. However, the total annual amount of fixed-term benefits cannot exceed the annual amount to be received from lifetime-pension benefits. Provision also exists for increasing or reducing the number of “blocks” in which one has enrolled. One can certainly sympathize with municipal officials who have to explain all the possible permutations to potential enrollees.
Speaking of clarifications: those voluntarily enrolled in the National Pension between the ages of 60 and 64 are eligible to enroll whether they live in Japan or overseas; however, those below the age of 60 and resident overseas are not eligible. It also appears that once you enroll, you can increase or decrease the number of blocks to which you are subscribed, but you can’t completely switch pension categories — you are limited to the categories you originally signed up for.
Before rewriting, you should probably look through the pamphlet to make sure I haven’t somehow managed to compound the confusion or mistated anything. The post should really be helpful for those wondering about the difference with the similarly named — and truly public — kokumin nenkin.
There’s also Kousei Nenkin Kikin…
Right, but at least that system is on the way out: since 2014 no new plans have been allowed, and most of the previously existing existing plans have been dissolved or converted to corporate DC or DB plans (apparently only a handful of funds remain in operation). Only those still enrolled in pre-2014 plans really have to worry about this anymore.
By the way, maybe you noticed that since April, nenkin techou booklets are no longer being issued by the government. Now everyone simply gets a kiso nenkin bangou tsuuchisho (sort of like the My Number notification card), including those who lose their original booklets.
these case studies are amazing, I thank everyone who volunteers. Especially appreciate that we can get new information and update our posts continually without fear of being shamed here. Big fan of this site, it got me and mine investing much more effeciently.
Thanks, great to hear feedback.
I’m always happy when someone helps me understand something better -bonus points if they do it politely 😉
Best thing about the RJ community is that people are helpful and supportive.