Only for 第1号被保険者
**I made a mistake in this post. I am going to leave the post as originally written, and explain the mistake and how it changes things at the bottom. I apologize for the sloppy writing -I should have done a bit more research.**
This post is only for people enrolled in the first level of the national pension scheme (第1号被保険者). This includes self-employed and freelancers, as well as people whose company does not help pay their pension. Workers enrolled in the second level (kosei nenkin) or their dependent spouses (who don't pay into the pension scheme) are not eligible, and neither are people who don't pay nenkin or pay a discounted rate.
Last month my wife received a letter from the nenkin administration encouraging her to enroll in a supplementary scheme to increase her eventual pension.
At first I dismissed the idea, then after a couple of days thought about it a bit more. We eventually decided to join the scheme.
Before making the decision, I found out there are actually two ways to overpay the national pension scheme. We'll talk about both of them in this post, and I'll explain why we chose the one we ended up going with (you can't join both).
First though, why would you want to pay extra money into the national pension scheme? By many accounts, the finances are in trouble and there is a chance people won't receive the pensions they were promised. A lot of people refuse to pay in at all, let alone pay more than they have to.
The maximum benefit for kokumin nenkin (after paying in for 40 years) is currently about 65,000 yen a month.
Well, there are three good reasons I can think of. First, the national pension is backed by the government, and therefore is unlikely to go completely bust. Second, it will be paid as long as you live, so there is no chance of it running out in the future if you live too long. And third, paying into the national pension reduces your taxable income.
The two overpayment schemes have the same requirements and benefits, but are quite different in practice.
付加年金 (fuka nenkin) is very simple. You pay an extra 400 yen a month, and your annual nenkin payment in retirement goes up by 200 yen a year for each month you paid. In practice this means that you break even after two years of retirement, not counting the (small) tax savings. It's a great deal.
国民年金基金 (kokumin nenkin kikin) is less simple. It is modular, and you buy an initial module that is a pension, then additional modules that provide you with pension or guaranteed payments for a limited period. You can choose how much to pay, up to 68,000 yen a month (all of which reduces your taxable income). The website explains everything and also has a calculator, but you may want to seek advice from the nenkin administration or a professional before making a decision.
In my wife's case, we decided to pay into the second system, because it would reduce her taxable income more (approximately 64,000 yen a month instead of 400 for the fuka system) and increase her pension more. According to the calculator, by paying in the maximum now (64,000 yen a month) she can increase her pension by about 40,000 yen a month.
Arguably, we could do better by investing the money. The future of the pension scheme in Japan is slightly uncertain. It will probably see changes in our lifetimes. It could be reduced, or changed. It could become means-tested. We just don't know.
However, I think that a monthly payment from the government has a greater value than the same amount from investments. Especially as we get older, a monthly cheque is simpler and less risky. I also doubt that the government will risk angering the elderly by breaking the pension promise to a great extent.
The tax savings are also significant for us, as we are trying to keep my wife's taxable income as low as possible while still saving as much as possible for the future. By maxing out iDeCo (68,000 yen a month), the Small-Medium Business Association retirement plan (70,000 yen a month) and the pension kikin (68,000 yen a month) she can reduce her income by over 200,000 yen a month, which also reduces local inhabitant taxes and health insurance payments (including long-term care payments, etc.).
Basically I think everyone should consider joining the fuka nenkin system, and people with higher incomes, who are already maxing out iDeCo, NISA, etc., or are paying a lot of income tax may want to consider the kikin nenkin system instead.
What do you think? Have you joined either of these schemes? Are we crazy for even considering it?
**So the mistake I made was that I overlooked the fact that iDeCo and nenkin kikin use the same tax allowance, and it is capped at 68,000 yen a month.
As my wife is already maxing out iDeCo, joining the nenkin kikin scheme is not going to reduce her taxable income any further.
Personally I think iDeCo is a better option than nenkin kikin, mainly due to political risk in the future (the chance that the government will change the nenkin system). iDeCo accounts belong to the individual unlike the general nenkin fund. Nenkin kikin may be an option for US citizens who want the tax deduction but can't buy mutual funds in an iDeCo account.
As we can't use nenkin kikin, I'll look into the fuka nenkin option instead.**