Japan: An Aging Society Not Prepared for Retirement
Jim Landers, The Dallas Morning News
Before the devastation of earthquake, tsunami and nuclear fire, Japan's Parliament was nearing a breakdown over attempts to increase taxes and cut spending for senior pensions and health care.
Politicians have now united to confront a natural disaster. Regaining control of the budget, however, will be much harder as reconstruction piles on more debt in a country already straining under the costs of an aging population.
Japan's social security budget woes are worse than those facing the United States, even though the Japanese government has faced up to them more often than the U.S. government.
Those confrontations with the cost of an aging society have had political consequences, however. A backlash among the elderly, who are ill-prepared for retirement, has created a powerful senior voting bloc that's defeating incumbent governments. Japan has gone through five prime ministers since 2006.
While poverty among the elderly is no worse than it is in the United States, recent surveys show hardly any Japanese know how much money they will have to live on in retirement. Fewer than one in five has a plan on how to spend it.
Analysts say this lack of readiness has political costs. Seniors are a powerful and growing voting bloc in Japan, and they have come to rely on the government to provide adequate pensions and health care. They don't like it when Japanese politicians try to reduce massive levels of government borrowing by cutting benefits.
"Especially among older Japanese voters, they are dissatisfied with their treatment, and they vote against the incumbent party," said Hiroki Takeuchi, who teaches Japanese politics at Southern Methodist University.
Robert Clark, a management professor at North Carolina State University who's studied the Japanese approach, said the Japanese have at least tried to get a grip on the budget problems of an aging society.
"What we ought to learn (from Japan) is, it's useful to take your projections seriously and make modifications to retirement costs in a timely manner," Clark said. "If we'd done that 10 years or 15 years ago, we wouldn't be facing some of the problems we're facing now."
The average Japanese person is 44.8 years old, the oldest average for any nation in the world, according to the CIA World Factbook's 2011 estimate. (The average American is 36.9.) Retired Japanese outnumber the nation's children. The Japanese government has had to borrow heavily to keep up with social security spending. Government debt now exceeds $12.1 trillion, or more than twice the economy's annual output.
"This earthquake will delay the debate on dealing with this problem," Takeuchi said. "It will make the problem even worse, when the problem is already very bad."
By 2025, the Ministry of Labor, Health and Welfare projects that health care spending will rise 70 percent, nursing home care by 160 percent and pensions by 40 percent.
These spending hikes are not the result of inflation. Japan has been experiencing bouts of deflation, or falling prices, for much of the last two decades. What drives the budget is an aging society.
Japan's population has peaked at 128 million. Nearly one in five Japanese is over the age of 65. By 2030, as the population declines, the portion of seniors is expected rise to more than one in four.
Since 1985, Japanese governments have fought four bruising parliamentary fights to lower retirement benefits, raise taxes and raise the retirement age. Even with the changes, half of pension funding comes from general government revenues.
The current maximum government pension (equivalent to Social Security) for a Japanese worker who retires after 40 years in the system is a little less than $10,000 a year.
The retirement age in Japan has risen from 60 to 65. Since 2004, benefits are indexed according to demographics - the fewer workers there are to support a growing number of retirees, the lower the benefits.
As in the U.S. Social Security system, current workers are taxed to pay for those already retired - a method known as pay-as-you-go.
Retirement taxes are 16 percent of an employee's salary, split equally between workers and employers. They'll increase to 18.3 percent by 2017.
Voters like Keiichiro Hakuta aren't keen on government budget cuts to deal with these developments.
Born in 1947, Hakuta was a Tokyo securities dealer who went broke when Japan's bubble economy burst in the early 1990s. The bust left him more than $300,000 in debt, which he said he has slowly paid off.
When Hakuta retires this summer, he'll get a lump sum of about $30,500 for working 16 years as a chauffeur. Part of that will go toward retiring the balance on $24,000 in medical debt that mushroomed in the hands of a high-interest lender. He and his wife will then have to live on pension income of $2,800 a month.
"When I came to Tokyo after graduating, I only saw a couple of years ahead and not more," he said. "Now I don't have those big dreams. If I have a home and I'm happy, it's OK. But I'm unsure of the future."
He hopes to find a friend who will let him live rent-free in a house far from Tokyo but has no prospects yet.
Hakuta's lack of preparedness may be extreme, but not being ready for retirement is typical of Japanese seniors.
Like many Americans, the Japanese have three economic pillars for retirement: a government pension, an employer's pension (often started with a lump-sum payment) and personal savings.
Akira Suzuki was compelled to retire seven years ago when he reached his 60th birthday. He wasn't ready to stop working and found a job as a contract employee with a government agency.
The job and his pensions gave Suzuki and his wife an income of $58,000 a year, but now he's had to leave his contract job, cutting his income in half. He's not sure if that will be enough. He and his wife are exploring whether to retire in a lower-cost country like the Philippines.
"In a way, I regret I didn't save more," Suzuki said. "I am strongly advising my daughter and her husband all the time to save more, but of course they don't listen to me."
Suzuki expects the government will soon have to raise the national sales tax from 5 percent to 10 percent. "Our political leaders cannot catch up with this changing political situation," he said. "I don't know whether they can carry out the necessary reforms or not."
Recent surveys by Nomura Research Institute and HSBC Insurance show that, among developed nations, the Japanese are among the least prepared for retirement.
HSBC has polled adults in 15 nations for the last five years about retirement. The survey of 1,000 Japanese in May 2009 found that 97 percent did not know how much retirement income they would have. (The same survey done in the United States found 86 percent did not know what their retirement income would look like.)
A Nomura poll in July of 1,000 Japanese born between 1947 and 1949 found only 20 percent had put together a retirement plan. Two-thirds didn't know how much they'd have to live on in retirement until, at best, a few months before they quit working.
Without a plan or investment strategy, most retirees keep their savings in ordinary savings accounts that earn very little interest, said Nomura wealth planning specialist Yuichi Hagino.
Meanwhile, consumers are relying even more on the government for security in retirement.
Personal savings, a strength of the Japanese economy for decades and a pillar of retirement income, have fallen sharply in the last decade. Households saved an average of 10 percent of their income in 1990. Savings fell to 1.7 percent of income in 2007. Last year, the rate rebounded to 4.7 percent. (U.S. household savings last year were about 5.8 percent.)
Hagino, the wealth management specialist with Nomura Research, said Japanese retirees could earn more in retirement but would rather keep their savings in banks than invest them.
"Our financial institutions need to work harder to help people plan for retirement," he said.
Hakuta blamed some of the consumer conservatism on the bust that brought down his firm. The Japanese stock market is still valued at only a third of the level it achieved in 1990.
"When the Nikkei index went to 20,000 from 33,000, I asked my customers to cash out," he said. "They refused, and then it went to 7,000."
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