Financial Services Agency reported in June that pension payouts in Japan will drop by 20% from 61.7% in 2019 to 50.8% by 2047. The report sparked outrage among the citizens who demand sufficient payments to sustain their life after retirement. The combination of demographic crisis and the subsequent working force shortage left no other choice to the Government of Japan but to redistribute pension funds in an attempt to sustain the pension system for the upcoming decades. Let us take a closer look at how the situation evolved.
The number in question is the pension replacement rate. It is a proportion of how much an average household (a married couple, where a man is over 65 years old and a woman is over 60 years old) will get in pension payments compared to how much it was getting as a net income. Currently, this number is 61.7%. However, in 30 years it can fall to 50.8%.
There is a negative gap of JPY 54,520 per month in pension payouts for a model household.
Each month an elderly model household gets JPY 209,198 and spends 263,718, leaving a negative gap of JPY 54,520. What it means for an average couple is that it has to save extra JPY 20 million in addition to pension payments to cover their basic daily needs for 30 years after they have retired. Where did that number of years come from?
Demographic shift threw the pension system in Japan off balance
Japan had introduced its pension system the way we know it today in 1959. In accordance with it, all the citizens in between 20 and 59 years of age must contribute to it through the regular payments. At that time, life expectancy in Japan was around 70 years. Thus, if a person retired at the age of 60, the pension system had to cover for about 10 years of one’s life. However, today, the average life expectancy in Japan is around 85 years, with a lot of people living to their 90s. Consequently, the pension has to cover for 25-30 years of life after retirement.
Moreover, Japan is experiencing a drop in birth rates known as shoushika and the aging population phenomenon known as koureika. As a result, the amount of young people able to contribute to the pension system has dropped, while the number of people consuming these funds keeps on growing. There are simply not enough payments made into the system.
Lifetime employment model as the basis for pension payouts crumbles
The concept of lifetime employment that is one of the cornerstones of Japan’s pay-as-you-go system is also in crises. On the one hand, it becomes more expensive for companies to cover all the benefits promised to full-time life-long employees. Very slowly but steadily Japan is embracing the shifts in the labor force, namely, the growing number of part-time workers and short-time workers.
On the other, younger generations are less attracted to the idea of staying at one place for their whole life and are willing to challenge themselves in different roles and places. It is not yet common to hop the jobs frequently, but the culture of the total dedication to one company has already started to change. Even though the process is slow, historically risk-averse Japan takes more steps towards entrepreneurship and tries to cultivate startup hubs and unicorns.
Moreover, Japanese laws and policies are not adjusted to current market requirements, failing to address the digital economy. Thus, contributing to the pension system becomes tricky. Knowing that might not get the full benefits of lifetime employment by the time they retire, people are less willing to make such a commitment.
What is next?
To address the situation the government of Japan has proposed a “macroeconomic slide”. In accordance with it, an increase in the pension payments should always be less than the inflation rate for an increase in the wage payments. The Ministry of Health, Labor and Welfare has presented six different scenarios exploring what the pension payout rate would be depending on different figures of economic growth.
In three of the optimistic scenarios, the payout rate should never go below 50%, which is the lowest bar set by the law. However, in the case of low growth, the pension payout rates may drop below 40%.
Some people have decided to take the situation under their control to a possible extent. For example, some companies agree to let people work beyond the retirement age. Some of the benefits of this approach are saving on new hires and the availability of experienced mentors in the team. In return, workers can continue to receive their salary and set some money aside for when they will retire.
"Otsumami" - a bite size snack:
It is common for working people in Japan to start saving for their retirement early in their career.