How pension totalization treaties work

Following up on my post yesterday for expats in Japan, wondering what the effect of Japan’s new visa renewal rule will be for them. (See August 3, 2009 post, that I am linking here.)

Starting in the 1970’s the United States began to seek treaties with other countries about old age pensions. In America, we call this “social security”. But it usually goes by other names in different places. Canada has the Canada Pension Plan (CPP). In Australia, it’s known as Superannuation or Super — sounds like “SOO-peh” when they say it, but same thing.

The programs seek to provide a basic pension on retirement, which works out to somewhere in the $600’s USD. Then, there is a variable component that boosts the check up into the USD $1,000’s or more. In the United States, it’s done by formula involving bend points. In Australia, I think it’s related to an extra amount of money that is put away tax deferred. Canada similarly tacks on an “IRA” or “401k” style tax-advantaged account, called RSPP, that people working in Canada can put money into.

Usually there is a requirement to participate a number of years before the government will ever pay out anything. In the U.S., it’s 10 years in the form of 40 quarters, where each quarter is when you have earned about $1090 (2009). These might also be called credits, and you can earn a maximum of 4 a year.

Canada measures this off a concept of working life, that looks to be assumed as 40 years, but may be as high as 47. I am not Canadian and I don’t really know. The x-number of years is adjusted to remove 15% of the time as “low earning years”.

Well, that is all that.

You can see however, that where someone splits his/her career between two countries, it’s possible that they can earn and pay in one country’s pension system, and earn and pay into another country, and still not qualify to receive any old age pension. What a mess.

So the project has been to get international agreements so that money paid in to one system will be recognized by the treaty partner country, combining the time-in in one system with the time into the other.

In this way, there is no fear that social insurance contributions are being wasted or lost for expats working in the other country.

Like I mentioned the United States has done a ton of these, and now places like Japan are catching up. Japan has these kinds of treaties with a whole number of nations, including: (as of 8/2009)

Japan Social Insurance Agency site

Germany, the UK, Korea, the US, Belgium, France, Canada, Australia, Netherlands and Czechorepublic (or whatever the new name is!) Japan is also in talks with places like Hungary and Sweden.

The whole end of the totalization treaties is to avoid both duplication and lost coverage on payments to national pension systems.

Normally in Japan, you need 25 years in to the program before you would see a check. 300 monthly payments! But under a totalization agreement with your home country, you potentially can receive a check from Japan with just one month’s payment. (That’s my case actually, because I have 24 years already with the States.)

For countries like Canada or the U.S., which require 10 years in, having five in back home, and getting five in Japan would qualify someone for the check back home at least. And then the Japanese portion once 25 total years were paid in overall.

For people committed to Japan who for whatever reason cannot make 25 years as a mathematical impossibility, I believe Japan has a regulation nicknamed kara kikan that allows certain time to be waived. I don’t know the particulars of it, but I understand that if someone gains permanent residency they can petition to have the time since Age 20 to be counted as part of the 25 years. And receive a fractional check for the amount of time they actually paid in.

So totalization treaties are a huge benefit, because they can give you some piece of mind about whether the money you are paying in nenkin coupons at the 7-11, or through the employer plan if you are lucky, will ever come back to you.

In the Japanese community, there are already a number of books written in Japanese about how people here who worked Stateside can get their fractional social security check, and the planning or strategies about how and when to collect. This FICA money had been written off until the treaty. Now people right in this country can benefit from what they paid to America.

One last point that I imagine the activists like Arudou Debito and Lou Carlet in the General Union’s affiliate in Tokyo NAMBU gaikokujin bunka kai are going to pick up on. In all the totalization treaties I’ve seen, there is language that says the foreign participant shall be treated on an equal basis with the citizens of the home country.

I also wish the U.S. Embassy in Tokyo would . . . ehem . . . pick up on the issue. You know, “change we can believe in” and all that. (Ehem.) The top guy has his hands full with Blue Dogs, Budweisers, and the whole lot of earlier problems that got dumped in his hands by Bush.

In the Canada treaty, the Equality Provision is Article 4. For the U.S. version, here, it’s Article 3, Section 1:

Persons who are or have been subject to the laws of one Party, as well as family members or survivors who derive rights from such persons, who ordinarily reside in the territory of the other Party, shall receive equal treatment with nationals of that other Party in the application of the laws of that other Party regarding entitlement to and payment of benefits.

As the activists and unions have been fighting for years against the widespread denial of expatriates from coverage in the Employer Pension Plan and Employer Health Insurance Plan, commonly known as Kousei Nenkin (厚生年金), those equality provisions are highly valuable.

It’s too often the case in Japan that you are asked to renegotiate things that you thought were already agreed. (And the flipside—of having to renegotiate the things where you are at first taken horribly advantaged of at the outset!)

This environment of bully negotiation and/or ever-constant shades of gray is maybe matter for another post. (As I’ve used up the gray matter for today on this one!)