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OECD: Japan’s public pension to provide 34% of salary

June 26, 2009
By Ken Worsley


According to the OECD’s “Pension at a Glance 2009″ report , Japan’s public pension system is expected to provide 33.9% of salary as pension to workers entering the workforce in 2009. This is the second lowest figure in the OECD, with only Britain trailing Japan. The OECD average for public pension payouts is 59% of salary.

The report also highlights that 22% of Japanese people over 65 had incomes below the what the OECD considers to be its poverty threshold (defined as half of median household income). The OECD average for people aged over 65 living under the poverty line is 13.3%.

The report also calls Japan the OECD’s “oldest” nation, with only 2.6 workers to support each retiree, versus an OECD average of 4.

One final key statistic is that Japan spends 8.7% of GDP on public pensions, while the OECD average is 7.2%. Of course, Japan has an average life expectancy about 4 years above the OECD average, which means the average pensioner needs to be supported longer.

Returning to the poverty threshold statistic: It is in the interest of the nation for the percentage of pensioners living below this threshold to decrease (though it will increase over at least the next five years). The elderly comprises a huge block of potential consumers in Japan, and if one in four elderly are essentially below the poverty level, they simply are not going to spend in any way that could possibly support domestic demand.

A better pension system relies on increased tax revenue, and that means consumption taxes need to rise. Naturally, this will also bring about the negative effect that people will spend less as taxes rise and their incomes continue to fall - average incomes in Japan are not going to rise significantly any time soon.

Of course, consumption taxes in Japan remain abnormally low. Even Keidanren is calling for hikes in consumption tax to help support the public pension system. I have advocated a gradual increase - 1% a year for five (or ten) years. This would help minimize the shock effect of sudden large increases in the consumption tax, while giving the government more funds to work with. At the same time, such a program should limit political risk; any party that institutes such a system has an opportunity to spin the policy as being good for the nation while emphasizing that its effect will be minimally disruptive.

At the same time, as someone required by law to pay into the national Japanese pension scam scheme, I can only advocate privitization of the entire system. Other young workers in Japan are not going to be happy about continually downward revised public pension payout projections - especially when we have better options available to us.

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Comments

7 Responses to “OECD: Japan’s public pension to provide 34% of salary”

  1. Matt on June 26th, 2009 6:54 am

    Ken:

    What do you think about the idea that the public pension system acts as a subsidy to certain industries in Japan that compete globally? I think that privatization of any retirement system is generally a good idea, but I’m curious about the side effects in the intermediate term.

  2. PH on June 27th, 2009 12:06 am

    This is really bad news, and something Japan’s mainstream media and politicians do not want to discuss. At some point, Japan is going to have no incentive to keep its own most talented young workers in the country. I think the OECD estimate is too high, and graduates entering the workforce in 2009 will be lucky to get 30% of salary when they retire. The pension system is clearly broken, but no one wants to talk about how to fix it. Why?

  3. Ken Worsley on June 27th, 2009 1:37 am

    PH, Japan’s pension fund continues to lose money in the markets year after year because it is managed by bureaucrats rather than professional investors. This is part of the trouble of the exam culture - you don’t have to demonstrate proven talent to be hired by a ministry, you simply need to have a high score on their exams, which you often cannot sit for after 25 years of age. This obviously has no indication of whether or not a new hire will be able to perform at the level required.

  4. Marc on June 27th, 2009 10:58 pm

    This is why I refuse to sign up for the pension system. It makes no sense to me, since the annualized rate of return is at a loss. Thus far, it has been easy for foreigners to avoid registering for this system. I don’t understand why you pay in. There are far better returns to be found elsewhere.

  5. Ken Worsley on June 28th, 2009 1:01 am

    Marc, it’s definitely not by choice.

  6. Ken Worsley on June 28th, 2009 1:03 am

    Matt, I don’t see how the pension system subsidizes any firms. It’s a penalty, as the firm has to pay 50% of pension contributions.

  7. Matt on June 30th, 2009 6:50 am

    50 percent is better than 100 percent that some companies pay.

    I have no idea what proportion the international competition pays out of private coffers, but if it is more than Japan’s 50/50, then the 50/50 turns out to be a subsidy to the businesses (even though the performance of the trusts are a disaster for the beneficiaries).

    I’m not trying to justify the nasty pension scam in Japan (clearly untenable from my perspective given my ignorance of international pension regimes). I was just trying to find some possible political justification. The two possibilities I come up with are:
    1. Effective business subsidy (in doubt)
    2. Increased pool to depress the yen

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