Global lessons and implications for Japan 1
Olivia S. Mitchell
As the twenty-first century dawns, global changes in pension structures are attracting keen interest from economists, demographers, and politicians. These pension changes are driven in part by rapidly-growing numbers of people aged 65 and older, an aging phenomenon that will have numerous positive as well as negative economic and social consequences. Nowhere is this set of economic and social challenges more salient than in Japan. This nation leads the globe in world aging, with its population recording the longest life expectancy patterns and among the lowest fertility rates in the OECD. This aging phenomenon, combined with recent economic stagnation, has begun to lead many to question how retirement can be financed in the future. Testament to this concern is a recent survey showing that over 90 percent of Japanese consumers were worried about the inadequacy of their own saving for retirement (Business Wire 1999).
New institutions must be developed to meet and cope with the challenges of population aging in Japan as elsewhere. 2 The task is difficult in Japan due to widespread corporate defined benefit pension plan underfunding problems 3 as well as national public pension cash-flow insolvency projected to occur before 2020 since the system has projected unfunded liabilities estimated at US$3.5 trillion. 4 Also contributing to this challenging environment are recent developments in financial accounting requirements that now require pension underfunding to be shown in accounting reports, 5 and the slow deregulation of the Japanese financial system. 6 But perhaps most interesting to retirement experts is the fact that these pressures are creating an environment favorable to the development of defined contribution pensions in Japan. 7 Thus the government of Japan recently announced that employees may contribute to defined contribution pensions in funded, invested accounts. Taking the lead, two large Japanese firms have allied to launch US-style 401(k) pensions giving participants choice over investments and access to international mutual funds. 8
Because the defined contribution (DC) pension model is new to Japan, other countries' experiences in the DC pension environment may be informative in illustrating the investment and governance frameworks needed to support such pension plans. For instance, several of Japan's East Asian