Academic journal article Social Security Bulletin

The Evolution of Japanese Employer-Sponsored Retirement Plans

Academic journal article Social Security Bulletin

The Evolution of Japanese Employer-Sponsored Retirement Plans

Article excerpt

Summary

This article examines the development of Japanese voluntary employer-sponsored retirement plans with an emphasis on recent trends. Until 2001, companies in Japan offered retirement benefits as lump-sum severance payments and/or benefits from one of two types of defined benefit (DB) pension plans. One type of DB plan was based on the occupational pension model used in the United States before the adoption of the Employee Retirement Income Security Act of 1974 (ERISA), but lacked the funding, vesting, and other protective features contained in ERISA. The other type of DB plan allowed companies to opt out of the earnings- related portion of social security, commonly referred to as "contracting out."

Landmark laws passed in 2001 introduced a new generation of occupational retirement plans to employers and employees. One law increased funding requirements and enhanced employee protections for employer-sponsored DB plans, while a second law introduced defined contribution (DC) plans for several reasons, chiefly to increase retirement savings and help boost Japanese financial markets. These laws complemented earlier changes in the tax code and financial accounting standards already affecting employer-sponsored retirement plans. As a result, new retirement plan designs will replace most prereform era company retirement plans by 2012.

In 2001, the experience of 401(k) plans in the United States, where 42 million participants had accumulated more than $1.8 trillion in assets over 20 years, attracted considerable attention among Japanese lawmakers finalizing provisions of the DC pension law. Even with government support and encouragement from the financial services industry, Japanese companies have not adopted these new DC plans in large numbers. As a result, occupational retirement plans in Japan have remained predominantly DB-a surprising development in light of the shift in a number of countries from DB to DC plans observed in recent decades. However, recent proposals to make DC plans more attractive to employers in Japan are likely to be implemented in the near future.

This article

* summarizes the Japanese retirement system, with an emphasis on private-sector employees, and the complementary role played by voluntary employer-sponsored retirement plans;

* describes the financial pressures that faced retirement plan sponsors in the late twentieth century and the factors motivating the reform of Japanese voluntary retirement plans;

* examines the 2001 legislative changes that have transformed company retirement plans; and

* concludes with a review of trends and recent developments in employer-sponsored retirement plans since the implementation of the 2001 pension laws.

Japan's Retirement System

A combination of low birthrates (1.26 children per woman of child-bearing age in 2005, well below the 2.1 needed to maintain population size) and gains in life expectancy at birth (rising from 76.9 years in 1980 to the current 82.6 years) has made Japan one of the world's oldest societies. According to government estimates, the percentage of Japanese aged 65 or older will climb from the current 20 percent of the population to nearly 36 percent by 2050, while the working-aged population, aged 15 to 64, will decrease from roughly 66 percent to about half the population (Dow Jones International News 2006). If these trends continue, the population will decline from its peak of 128 million in 2005 to 101 million persons by 2050. To counteract effects on social security finances from these projected demographic developments, the country initiated a series of major reforms in 1994, 1999, and 2004 to limit social security retirement program expenditures.

Japan's retirement system is largely comprised of a social security system and employer-sponsored retirement plans. Under the social security system, privatesector employees and the self-employed are treated differently (U. …

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