Pension in Japan

The Ministry of Health, Labor and Welfare is apparently considering a proposal to publicly honor wealthy retirees who decide not to collect their pension. Currently a pensioner who starts collecting their payments cannot opt out of the system, but the new proposal will allow wealthier pensioners to opt in and out depending on their feeling of financial well-being.

The incentive for not collecting a pension will be an official “thank you” from the government and public naming, with their permission. Since about 1m Japanese have personal assets worth JPY100m or more, and most of them are people aged over 65, the government reckons that if just 10,000 wealthy seniors forwent their pension it will save the nation more than JPY20bn a year.

So, we have a question. Would you, after 25 years of paying what is becoming an onerous amount of tax, and knowing that the government is still allowing bureaucrats and local governments to pilfer money and enjoy perks such as luxury housing in inner city locales, would you suddenly and heroically be willing to donate your pension to the government? We didn’t think so. The fact is that asking ordinary people to make an extraordinary sacrifice requires extraordinary circumstances — usually a war, disaster, or social revolution. Now, in the spiralling government debt, it is true that we have a disaster in the making, but the consequences of it are still years away.

If the government is truly serious about getting rich people to support pension cuts or deferrals, they will need to offer incentives that will appeal to the target audience
— such as inheritance tax breaks. Most of Japan’s so-called rich are in fact not so liquid, possessing most of their wealth in land and just a modest amount in cash and stocks. If such people thought that they could keep their estates intact after death, passing them on to their families without taxation, a number of them may well be willing to forego the monthly state-sponsored stipend.

Japan’s underfunded pension situation has already undergone radical surgery, when in 2004 the premiums (tax) paid by salaried workers was put on a schedule to almost double through to 2017. The increase certainly did rescue the pension program from imminent crisis and it was done with just a modicum of grumbling by the voting public. But with the recent news that the nation’s birth rate continues to drop, the government’s actuaries are realizing that the population curves they predicated the 2004 adjustments on are already out of whack. The low end was supposed to be a birth rate of 1.31, but in fact last year the rate fell to just 1.25. Either the Japanese need to make more babies, soon, or more tax is needed.

The government has already promised that it won’t tax workers more than 18.3% (the maximum in 2017) of their salaries to support the pension, so a repeat of the 2004 exercise is not planned. Instead, the politicians are now talking about doubling the consumption tax to cover obligations instead. The problem with doing this is that it will probably kill the reviving economy, just as happened in 1997 and 2001. The Abe cabinet is very aware of this situation and instead has said that they plan to delay a political debate on the topic until Fall of next year earliest, giving Abe enough time to settle in, the LDP to win the Upper House Elections, and presumably for his team to scape-goat and replace the Social Insurance Agency, a process Abe started doing while still Chief Cabinet Secretary.

If you’re in your 40’s right now, you stand to have the dubious honor of being the first generation to get little or nothing (at least, you’ll get nothing until you’re 65, since that will be the new retirement age from 2013) for a tax which in 10 years time will be equal to about 36% of your salary (half paid by you, half by your employer). A recent AXA Japan survey found that 97% of Japanese believe that the pension will drop even more than already forecast, in the next 10 years, and that 43% feel gloomy about their retirement.

With a situation like this, we see there being very little alternative but to either introduce a means-tested pension, such as employed by the UK or a “citizens” pension such as used in New Zealand.

The problem with means testing is that it acts as a disincentive to many people to would otherwise save for their retirement, since they are going to be forced to use up those savings — and they consume as they earn. Actually this may not be such a bad thing in Japan. However, a recent survey in the UK has found that the system is deeply unpopular, with over half of tax payers wanting it to end.

The “citizens” pension is a concept whereby all citizens of the nation upon retirement receive a basically equal amount of pension, regardless of how much they actually contributed during their working lives. This thus provides a public safety net, but allows the government to decouple itself from past pension funding deficits.

Regardless of which direction the policy makers go, one thing is for sure — they are going to have to drop the guaranteed minimum benefit ratio of 50% of pre-retirement income and raise taxes. Our guess is that the government will increase the consumption tax in 2008 after much public hair-pulling, probably to 10%, and over the following 10 years substantially reduce pay-outs to recipients. Perhaps they will go for an NZ-style flat-rate pension program, since this is something that the opposition DPJ party is already promoting.