Social Security Reform Ideas in Japan

Abstract

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Baby boomers in retirement: what are their prospects?

This Issue Brief examines the baby boomers' retirement income prospects by analyzing trends in the elderly's income and pension participation among workers; examining saving behavior and critically evaluating studies of the adequacy of the boomers' saving; and looking at tenure trends, lump-sum distribution preservation, and changes in Social Security benefits. Since the mid 1970s, the real median income of individuals aged 65 and over has increased 18 percent. Sources of income have shifted, with employment-based pensions increasing and earnings and asset income decreasing as a proportion of income. The boomers' prospects are partly dependent on participation in employment-based retirement plans. After decreases in the sponsorship rates, participation rates, and vesting rates of workers during the 1980s, all three percentages increased during the early 1990s. Data do not support the perception that the U.S. work force is becoming increasingly mobile. Tenure levels for prime age workers in the 1980s and beginning of the 1990s were higher than those of previous decades. Still, in response to competitive pressures, employers may not offer the security of paternalistic benefit packages as in the past. Various studies have reached different conclusions regarding the adequacy of the boomers' financial preparation for retirement. Evidence indicates that boomers, in general, will enjoy a retirement standard of living exceeding that of their parents. It is less clear whether they will maintain a standard of living in retirement comparable to that of their working years. To the extent they are willing to tap housing wealth, they would appear at this early stage to be in good shape. Federal fiscal policy decisions will impact boomers by affecting their disposable income today, and thus their ability to save, as well as the benefits they will receive in retirement through Social Security and Medicare. The boomers are 17 to 35 years away from age 65. Given heterogeneity of the boomers, research is needed to identify what specific groups within the generation are at risk and the magnitude of that risk. Groups that would now appear to be at risk to some degree include non-homeowners, the less educated, the single, and the youngest boomers.     

RETIREMENT,PERSONALITY, AND WELL‐BEING

This study investigates how two sources of individual heterogeneity—personality and gender—impact the well‐being effects of retirement. Using data on older men and women from the British Household Panel Survey and its continuation, Understanding Society, we estimate the causal effect of retirement on satisfaction with overall life and domains of life in the presence of personality characteristics. As retirement is often considered to be a choice and thus may be endogenous to individual‐level characteristics, we use the eligibility ages for basic state pension in the United Kingdom as instruments for retirement. We find that retirement increases leisure satisfaction of both males and females but not necessarily life satisfaction and income satisfaction. We further show that certain personality characteristics affect the well‐being of female retirees. For males, however, personality does not seem to matter in how they cope with retirement. (JEL I31, J26, A12, C23)     

Economic Security for the Elderly in India

Summary

The basic concept of social security is not new in India. Traditionally, a sort of moral economy existed to provide security to older destitute and other vulnerable groups in society. However, gradually, traditional support systems are disappearing, and state-based social security systems have come into existence. Under standardized economic security policies, government is covering retirement benefits for those in the organized sector; economic security benefits for those in the unorganized sector; and old-age pension for rural elderly. These are contributory as well as non-contributory programs. Besides life insurance approaches, savings-linked insurance and Annapurna (food security) are other important programs. However, in terms of coverage, program quality and effectiveness have been largely criticized by social security experts, suggesting immediate reforms to old-age programs.     

EBRI 2008 recent retirees survey: report of findings

Understanding how to achieve longer work lives: The 2008 Recent Retirees Survey was undertaken to better understand the tools and practices that might encourage workers to postpone their retirement and remain longer with their company. Why do people retire when they do? Respondents typically retired from employers for one of four reasons: retirement becomes affordable, lack of job satisfaction, a desire for more personal or family time, and/or their own health status. Narrow window for asking people to work longer: One of the major findings from the survey is that employers have a narrow window of up to two years in which they may be able to intervene to change retiring workers' decisions by offering them incentives to remain with the company. Employers may just need to ask: Many retirees report they would have been open to an approach from their employer asking them to stay longer with the company. Sixty-one percent say they would have viewed the experience positively. Just 10 percent indicate they would have reacted negatively to an approach asking them to delay their retirement. Work incentives vary in appeal: The survey tested a total of 19 possible incentives that might encourage retiring workers to postpone retirement. Four of these appear especially likely to be successful: Half of retirees (48 percent) indicate that feeling truly needed for an assignment would have been extremely or very effective in encouraging them to delay their retirement. Moreover, of those ranking this as one of the top two most effective incentives, 72 percent say it might have prompted them to stay at least two more years with the company. Half of retirees with a defined benefit pension state receiving a full pension while working part time would have been effective in delaying their retirement (50 percent), and almost as many feel this way about receiving a partial pension while working part time (44 percent). Seven in 10 of those rating each among the top two most effective incentives report they would likely have stayed at least two more years if it had been offered to them (72 percent for full pension, 71 percent for partial pension). However, this would necessitate a change in federal law and several other compensation-related incentives may be almost as compelling. Thirty-eight percent report that being able to work seasonally or on a contract basis would have been effective in encouraging them to delay retirement. Among those rating this as one of the top two incentives, more than three-quarters (77 percent) say it might have prompted them to stay two years or more with the company.     

Social security reform ideas in Japan

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Social Security in Asia and the Pacific

Abstract

In terms of numbers of people, the global challenges facing social security systems are largely Asian. Because of rapid population aging in Asia, while it accounted for 28% of the world's population aged 60 and older in 1985, that percentage will more than double to 58% in 2050. Provident funds are a prominent feature of retirement income systems in the region-Asia and the Pacific contain the majority of the world's countries with provident funds. These programs typically provide lump-sum benefits, and thus, do not provide annuity protection against outliving one's resources. Because of the influence of Confucian philosophy with its emphasis on family responsibility for elders, countries in the region have been relatively slow in developing social security programs. China does not have a social security program for workers who do not work for the government or in government-owned enterprises.     

Retirement and risk: the individualisation of retirement experiences?

A climate of uncertainty and risk exists in the field of retirement and pensions. Many employers have modified their pension schemes shifting the financial risk onto employees. Many individuals with private pensions have watched the value of their savings diminish. Added to this, the trend toward early retirement before state pension age has destabilised the traditional life course notion of a fixed retirement age, (especially for men). As a result, the concept of retirement itself has become more unpredictable and difficult to define. In this article we examine the extent of the individualisation of retirement experiences by reference to a study of retirement transitions in two organisations. The research investigated the influences on people's retirement decisions and the extent to which they experienced choice and control over how and when they retired. It is possible to identify a pattern of individualisation in contrast to its opposite of a mass transition into retirement, collectively understood and embedded in formal, institutionalised arrangements. However, underlying this fragmentation of experience there are clear structural patterns. The form that structured individualisation took here, was less to increase the majority of people's range of alternatives and choices over when and how to retire and more to enlarge the range of risks they had to cope with.     

Individual Pension Plans in Spain: How Expected Change in Future Income and Liquidity Constraints Shape the Behavior of Households

Understanding the motives that underlie Spaniards’ retirement saving decisions is important because many, if not most, future retirees will need to rely on personal savings to maintain a decent standard of living. The governor of the Bank of Spain has stated recently that the current public pension system will not guarantee an adequate pension to the citizens, advising to save now for retirement. In this debate on public pensions, and the complementary role that private pensions might play in Spain, this article has shed light on the decision of Spanish households to engage in individual pension plans and it has identified which factors determine the total amount saved in such retirement plans. Using micro data from the Bank of Spain (Survey of Household Finances 2011), the analysis has revealed that the expectations of lower future income, along with preferences for the financial risk and education, exert an important influence on the likelihood of enrolling in a private pension plan. University education minimizes the myopic behavior of households in the sense of making them more forward-looking and cautious in the face of their future well-being. Additionally using Heckman’s methodology to correct for the problem of selection bias, our results have revealed that liquidity constraints affect negatively the total amount of money saved for retirement.     

Research on the Accumulation Effect of Pension Income and Payments Caused by Progressive Retirement Age Postponement Policy in China

A retirement age postponement policy will not only increase pension income but also reduce pension payments, which will cause an accumulation effect on the size of the pension fund and relieve the intensifying pressure on pension payments. Based on the analysis of historical data in order to predict the population and pension scale in China, this research shows that the working-age population will gradually decrease, the supply of labor will decrease, and the demographic dividend will gradually disappear between 2018 and 2055 if the current retirement policy remains unrevised. According to three different retirement age postponement policy options, we establish that there are significant accumulation effects that can alleviate the pressure on pension funds. Among these policies, the postpone retirement policy option, which is based on the working period, is more conducive to a smoother policy implementation effect in the long term.     

What motivates single women to save? the case of Japan

Using Japanese panel data, we analyze precautionary savings due to staying single in the presence of income uncertainty. Our panel analysis finds that compared with young women who are likely to get married within 3 years, those who are not plan to have 44 percent more savings for precautionary purposes, and 108 percent more for retirement. These results suggest that in facing higher risk of income fluctuation due to choosing to marry late or remain unmarried, young women intend to have more wealth to mitigate the income risk inherent in single life.     

The Effects of Vesting and Locking in Pension Assets on Participation in Employer-Sponsored Pension Plans

This study assesses whether pension vesting and lock-in regulations affect participation in employer-sponsored pension plans. Specifically, the effects of Canadian reforms enacted during the 1980s and 1990s are investigated, which reduced vesting and lock-in requirements from employees being at least 45 years old and having ten years of continuous plan membership to two years of membership irrespective of age. To credibly identify these effects, the analysis exploits inter-provincial variation in the timing of the pension reforms using a difference-in-differences approach. The results show that employees aged 25–54 responded positively to the added protection of their pension wealth by increasing plan participation, despite the general trend of declining occupational pension coverage during this time. However, these changes also crowded out contributions to other retirement savings accounts. The implications of these findings for the optimal design of private pension systems are discussed.     

Bridging the Gap: Anticipated Shortfalls in Future Retirement Income

Determining an appropriate and desirable income replacement rate is one of the keys to developing a successful personal financial plan for retirement. In the present investigation, we examined workers?? expectations of the pre-retirement income they believed would be necessary in order to have a ??good?? retirement relative to the income they anticipated they would receive. Analyses revealed an expected income shortfall, the magnitude of which was positively related to one??s income and age. Sex was also related to the magnitude of the expected shortfall, with women anticipating a larger financial discrepancy than men. Finally, a sex by marital status interaction emerged in which single women were found to have a larger shortfall than single men and married individuals of both sexes. Findings are discussed in terms of the importance of interventions aimed at educating workers to understand the value of selecting a reasonable retirement income replacement rate.     

Implications of the Social Security amendments of 1983 for older blacks

The 1983 amendments to the Social Security Act reduced early retirements benefits and increased the retirement age for future retirees. These changes will differentially affect various segments of the older population. The author examines implications of these changes for older blacks, and concludes that disability and low income are primary factors that put older blacks at risk for negative consequences as a result of the 1983 amendments. The findings suggest that blacks are likely to be disproportionately affected by the changes, and that the changes, as they relate to blacks, do not address the amendments' goals encouraging private savings and discouraging early retirement.     

AN EXPERIMENTAL TEST ON RETIREMENT DECISIONS

As part of the current debate on the reform of pension systems, this paper presents an original experimental test where subjects face three different payoff sequences with identical expected value. Two central questions are analyzed. First, whether the distribution of retirement benefits across time influences the retirement decision. And second, whether actuarially fair pension systems distort the retirement decision. The results indicate both that a lump-sum payment rather than annuity benefits is far more effective in delaying the retirement decision and that recent reforms that encourage the link between lifetime contributions and pension benefits to delay the retirement decision should take into account timing considerations. ( JEL C91, H55, J26)     

Retirement systems and pension reform: A Malaysian perspective

This paper reviews and assesses emerging issues in retirement systems and pension reform in Malaysia. The pension system models proposed by the ILO, the World Bank and the Geneva Association are compared and analysed, providing a useful conceptual framework for the design and reform of pension systems. This framework is then used to assess pension reforms in Malaysia, analysing the relative advantages and disadvantages for workers. The authors conclude by proposing a number of recommendations for retirement system design and reform.     

The changing face of private retirement plans

A rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the "baby boom" generation, will have adequate retirement incomes. One reason is that Social Security's projected long-term financial shortfall could result in a reduction in the current-law benefit promises made to future generations of retirees. Another reason is that many baby boomers will be retiring with employment-based defined contribution (DC) plans, as opposed to the "traditional" defined benefit (DB) plans that historically have been the predominant source of employer-provided retirement income. These factors are likely to reduce the amount of life annuity benefits that future retirees will receive relative to current retirees, raising questions as to whether other sources of retirement income--such as individual account plans (DC plans and individual retirement accounts, or IRAs)--will make up the difference. This Issue Brief highlights the changes in private pension plan participation for DB and DC plans and provides some possible explanations for these changes. Results are presented from the Employee Benefit Research Institute's (EBRI) Retirement Income Projection Model that quantify how much the importance of individual account plans is expected to increase because of these changes. This Issue Brief also discusses the risk of outliving one's assets, since a greater fraction of pension wealth is projected to come from "nonguaranteed" sources. Results of the model are compared by gender for cohorts born between 1936 and 1964 in order to estimate the percentage of retirees' retirement wealth that will be derived from DB plans versus DC plans and IRAs over the next three decades. Under the model's baseline assumptions, both males and females are found to have an appreciable drop in the percentage of private retirement income that is attributable to defined benefit plans (other than cash balance plans). In addition, results show a clear increase in the income retirees will receive that will have to be managed by the retiree. This makes the risk of longevity more central to retirees' expenditure decisions. The implications of these model results for retirees are significant. First, individuals--rather than the pension plan sponsor--increasingly will have to manage their retirement assets and bear the risk of investment losses. Second, since most retirees' non-Social Security retirement income will be distributed as a lump sum or in periodic payements (from a defined contribution plan or IRA) rather than as a regular paycheck for life (from a defined benefit plan), retirees will need either to purchase an annuity from an insurance company or carefully manage their individual rate of spending in order to avoid outliving their assets.     

What the 2008 Stock Market Crash Means for Retirement Security

The 2008 stock market crash raises concerns about retirement security, especially since the increased prevalence of 401(k) and similar retirement saving plans means that more Americans are now stakeholders in the equity market than in the past. Using a dynamic microsimulation model, this paper explores the ability of alternate future stock market scenarios to restore retirement assets. The authors find that those near retirement could fare the worst because they have no time to recoup their losses. Mid-career workers could fare better because they have more time to rebuild their wealth. They may even gain income if they buy stocks at low prices and get above-average rates of return. High-income groups will be the most affected because they are most likely to have financial assets and to be invested in the stock market.     

Family history and pensions: The relationships between marriage,divorce, children,and private pension coverage

This article examines how family history affects the odds of private pension receipt and how these effects vary by sex. Analyses indicated that family history had opposite effects for men and women. Compared to continuously married men, men who were single or divorced had lower odds of pension receipt; having children was associated with higher odds. For women, being single or divorced was associated with higher odds of pension receipt, and having children decreased their odds. After reanalyzing the effects of family history in the context of couples' joint pension receipt, the negative association between pension receipt and children becomes insignificant for women, and being single, divorced, or widowed has negative effects for both men and women. These results suggest that if individuals stay together as a couple, they increase their chances of access to a pension and financial well-being during retirement.     

GENDER-BASED RISK AVERSION AND RETIREMENT ASSET ALLOCATION

This research examines whether women have higher risk aversion than men as demonstrated by their retirement asset allocation. The analysis is extended to investigate how retirement asset investment decisions are made in married households. Initial results suggest controlling for demographic, income, and wealth differences lead to no significant difference in the proportion of retirement assets held in stocks between women and male faculty. For married households with joint investment decision making, results indicate that gender differences are a significant factor in explaining individual retirement asset allocation. Our estimates imply that women faculty are more risk averse than their male spouse. ( JEL J16, G11, D10)