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Japans retirement squeeze with an ageing population and fewer workers


Tuesday, September 15th, 2009

The risk of poverty in old age is surprisingly high in Japan, which is not only a wealthy country but has a mandatory pension system designed to cover every adult.

Japan’s baby boomers began retiring in 2007 and while other industrialized countries wrestle with meeting the needs of a suddenly large cohort of older people, the problem is compounded in Japan, which has the lowest birth rate among developed countries.

The OECD has found the risk of income poverty in retirement is comparatively high and will worsen as baby boomers enter retirement.  The percentage of the population aged over 65 reached a record 22 per cent in 2008 and the increase has been rapid, it was 7.1 per cent in 1970.  The gap between the old and the very young is widening too.  The number of children aged 14 years and under has been shrinking since 1982 and they now comprise 13.5 per cent of the population. 

The low birth rate is a constant theme for economic and social policy planners who foresee rapid population decline putting a strain on economic growth and the country’s ability to provide social security.  Added to that is growing Japanese life expectancy, among the highest in the world.   Children born now can expect to live to 86 for women and 79 for men.

Japan has a three-tier retirement system.  It is mandatory for all residents, including foreigners working in Japan, to join the National Pension Scheme, which provides a basic pension when people turn 65.  The Employees Pension Insurance Scheme pays an earnings-related pension on top of the basic pension and applies to most employees, with the premium being shared by workers and employers.

These two tiers are operated by the government but the third tier comprises optional schemes which are run by the private sector and government.  Life insurance companies also provide individual plans.  About 90 per cent of Japanese firms offer a retirement package, either a lump sum or a pension, and about 45 per cent of the workforce is covered by private pensions.

In recent times, retirement savings have been hit lower investment earnings, particularly in Japan with its long period of economic stagnation and low or zero interest rates. However, the Government Pension Investment Fund, the world’s largest pension fund with assets of over 121,861.9 billion yen (US$1,337 million), provided a glimmer of hope in the first quarter, making a return of 3.89 per cent after three quarters of negative growth.

The constant discussion about the ageing population and moves to increase the retirement age have made Japanese people pessimistic about their prospects in old age, a time many had looked forward to after a working life as “salarymen” whose lives were very controlled.   When HSBC this year surveyed 1,000 people in each of 15 countries about retirement it found 97 per cent of Japanese respondents felt unprepared for life after the workforce.

Just over half were saving over the long term in preparation for retirement, the highest national percentage recorded in the survey, but although they recognized the need to save more, 60 per cent had no form of financial education and 79 per cent had never accessed any form of professional financial advice.  Many may live to regret it as they struggle to enjoy life in their later years.

Sources:
The National Institute of Population and Social Policy Research:
 www.ipss.go.jp/index-e.html
The Nomura Research Institute this year produced a paper explaining pension schemes in Japan
www.nri.co.jp/english/opinion/lakyara/2009/pdf/lkr200954.pdf
www.gpif.go.jp
www.hsbc.com/1/2/retirement/future-of-retirement