The Japanese Retirement System--Comment by Posner

It stands to reason that if retirement benefits are chintzy, people who reach retirement age, provided they are allowed to accept their retirement benefits while still working, will continue working. That appears to be the main reason why, as Becker explains, although Japanese workers obtain their full retirement benefits at 60 the average retirement age is 69. However, there is nothing paradoxical about the disjunction between the nominal retirement age, that is, the age at which one begins to receive one's full retirement benefits, and the actual retirement age. Indeed, the earlier the official retirement age, the later the actual retirement age is likely to be because retirement benefits are always lower the earlier they are taken. If one were entitled to full retirement benefits at the age of 30, the benefits obviously would be too low to support one’s standard of living--indeed, so low that one might not be able to afford to retire ever! The disjunction works in the opposite direction in the United States. The "official" retirement age is higher than in Japan, at 65, but the actual retirement age is lower. The explanation is the same: the higher the retirement age, the larger the retirement benefits, and so the smaller the incentive to work past that age. A curious feature of the Japanese system is the tendency to demote workers when they reach the official retirement age of 60. But this does not appear to be a consequence of the law. In the U.S., many workers are entitled to take early retirement at reduced benefits, and if they do so their employer can rehire them at a lower wage. (Thus U.S. companies can adjust the age profile of their workforce by early-retirement programs, which create monetary inducements to early retirement.) But this is not, as far as I know, particularly common. It seems that Japanese employers have devised a system of staged retirement--partial at 60, with an appropriately small pension because the employee is continuing to work, albeit at a reduced salary to reflect his reduced productivity, and full at (about) 69. A staged system, by matching salary to productivity, seems more efficient; but, if so, one wonders why more American employers do not adopt it, as they could do by rehiring at a reduced wage employees who had taken early retirement at age 60. One possibility is that Americans value leisure more than Japanese do and that this rather than differences in pension law or practices explains the earlier average retirement age in the United States. The fact that private as well as public pension plans tend to be less generous in Japan is consistent with this conjecture. The less people value leisure, the later they will want to retire and so the less money they will want to put aside for retirement. For a detailed description and economic analysis of the Japanese retirement system, see Bernard H. Casey, “Reforming the Japanese Retirement Income System: A Special Case?” (Sept. 2004).

Comments

[Yehuda]

While it does seem likely that Americans, on average, value leisure more then Japanese as a cultural attribute, doesn't it seem likely that legal systems have a significant effect?

The American system's legal inability to discriminate between people based on factors that can actually be relevant to employment and performance, while perhaps enhancing social justice, seems like it prevents efficient distribution of business resources. The staged system may not only be very complicated legally, it also hints at employment discrimination, which in our litiginous age seems like it whould deter employers even more from considering the idea.

It may also be a social question. Respect for older people is very high in Japan and therefore someone who was "demoted" in this way will probably have less trouble and discomfort then in America. I think it would be very problematic in America for a former high profile employee who retired because of age to return to the same place as a lower level employee, ecpecially with the official stamp of "OLD" on him.

[TheWinfieldEffect]

PENIS TAX?

One significant aspect of the Japanese retirement system is how it reflects broader political and social reality. Retirement benefits in Japan used to be linked to promoting childbirth and child-rearing -- after all, couples that raise children bear a tremendous opportunity cost.

But since women have begun to flout traditional Japanese gender roles and social expectations -- marrying later in life, not having children, living as single women into their fifties -- the benefits they draw from the system are no longer in exchange for the opportunity cost of bearing children and raising them, i.e., it's just free money. In other words, it's an income transfer from typically rural families (where women tend to marry and have kids) to typically urban singles (who tend to have more education and economic opportunity).

This has caused Japanese politicians to seek reform of the retirement system to focus benefitting families and not singles, which, of course, has angered Japanese feminists. There was a Washington Post article from not too long ago quoting a Japanese minister who noted that the retirement system had been transformed into a "penis-tax" (you bear the brunt of the tax if you have a penis; you receive a cost-free benefit if you don't).

BECKER: "The less people value leisure, the later they will want to retire and so the less money they will want to put aside for retirement."

Oddly, Japanese women as a group (because of the growing numbers of them living as unmarried middle-agers) have begun to value leisure more, but they also acquire assets like homes and cars and stocks and bonds. While those assets are not specifically retirement savings, they can certainly be used as collateral to finance retirement. At the same time, because the retirement system is still assuming that older persons have already raised children and deserve what amounts to compensation from the state, these singles get the state bundle o' cash too. The result is not a net of less retirement savings for these free riders, but a net of more (at least for the free riders).

[Paul Deignan]

It is also possible that US workers retire early to take on independent employment consulting, contracting, investing, etc. We should expect a greater proportion of self-employed in an information economy than one based on large capital investments.

Whatever the cause, this is an adaptation that is not a "problem" unless it occurs as a result of noneconomic incentives (such as mandatory government policies) or due to transient effects (such as population booms). Of course, if we don't know the reason for the phenomena, it would be folly to assert the need for a certain "cure".

Note that we had a similar "overpopulation" scare back in the 1970s. People in the western democracies actually were lead to believe that this was a crisis. So they pushed through no-fault divorce together with abortion on demand (just to name a couple governmental innovations). Now, as they grow older and seek retirements benefits, they find that they have depopulated the pool of workers needed to provide for their comfortable years. Folly.

I like to think of it as societal Darwinism at work. Perhaps we will go the way of Logan's Run on our next iteration to cure this "problem". Looks like we are already down that path.

[David]

Logan's Run - great reference! Or we could simply go the way of the ancient Greeks and leave the unproductive old people out on the mountaintops..

I agree with Paul that this is not a "problem" mandating a collective or political solution unless it is the result of some government policy. Of course, in the U.S., we have age-based eligibility for "retirement" benefits like social security and medicare. So perhaps, if the large majority of elderly workers can be productive past age 65, those benefits should kick in later. Otherwise, retirement age should be a matter of personal choice, not to mention personal means.

Perhaps Posner and Becker have lived too long in the insulated, life-tenured hallways of academia and the federal courts to realize that the market actually does work here. Companies force the unproductive sexa- and septagenarians out of their jobs, one way or another. Even government agencies do so, when faced with budget crises. Perhaps the American sense of pride wrongly views such "layoffs" or "early retirements" as more socially acceptable than demotions or pay cuts. But that's not a matter for the legislature.

Finally, does anyone see any tension between this week's topic and last week's posts regarding the tendency of employees to stay in their jobs too long? Just wondering..

[N.E.Hatfield]

David, In regards to your final paragraph, "Yes I see a tendency, but when it comes to the upper and hallowed halls of the Fed., sometimes silence is the better part of valor." ;)

Now.... In terms of using the Oriental paradigms as models for U.S. problem solutions, I've got a problem. After spending some time on the study of Oriental philosophy in contrast to Occidental philosophy, one thing becomes readily apparent. That is, "those guys just "THINK" differently than we do." Hence the development of one of my pet theories regarding the differences between the Oriental mind and the Occidental mind. This goes far beyond the explantions of social and cultural impacts on ideas and vice-versa. It is for this reason that I believe that simply transplanting Oriental Models into an Occidental system may be doomed to failure.

I may be wrong, but I don't think so. At least these models become grist for the mill so to speak.

[Nathan Kaufman]

Why do organizations do irrational things?

[Corey]

"That is, "those guys just "THINK" differently than we do.""

Sorry, but I am not going to just take your word on that. If that were the case, we would not have been able to extract so much meaning from the literatures of Mishima, Kawabata, or Murakami.

Perhaps you should watch some of the humanist films of Kurosawa... Ikiru would be a choice particularily relevant to this week's topic. Or look at Ozu's Tokyo Story, or any of the films of Imamura. Not only are these films brilliantly accessible to western audiences, they have influenced hundreds of later American films.

During the month I spent in Tokyo, I observed many differences in culture and daily life, but I was suprised how easy it was to communicate with japanese people, even with the language handicap.

People are built fundamentally the same, we all go through the same basic life cycle. Human experience is similar in the ways that really matter. With global communication, we share more ideas and culture than ever before. I believe that "the way people think" is simultaneously more similar and more diverse than your thesis based on racial/ethnic groupings. I've clicked with many "orientals" on a deep level, and I clearly don't think like many of the white guys posting here, even though ethnically we match.

Perhaps you should have included a little Edward Said in your readings in Orientalism.

[N.E.Hatfield]

Corey, And where in all the Occidental world have cultures and societies been set up on the principles of Confucianism, Buddhaism, Taoism, and the code of the Bushido? Where in all the Occidental philosphies have such principles even been articulated? Hmmm...? And that's just for starters.

Yes, life experiences are similiar, but responses to experience is not. And the question is why? It all lies in the mind, its development and the development of an epistemology and the like.

"Ahh..., you have much to learn young Skywalker."

[Corey]

I don't know, maybe I will inquire at one of the two Tibetan Buddhist monastaries in my town in Indiana.

A lot of "Occidental" people are less ethnocentric in their intellectual pursuits than you give them credit for Hatfield.

[N.E.Hatfield]

Corey, A trip to the monastery isn't necessary. All that's required is good Public Library. I assume they still exist among the soybeans, corn, cows, hogs, crows and dust. BTW, had any rain lately?

[Bill Harshaw]

The federal government used buyouts in the 90's to reduce the workforce (as part of Gore's "reinventing government"). Speaking for myself, the government probably gained by getting me to retire, as I was burned out and had stayed too long in the same position. However, while "demotion" has unacceptable connotations, a move to a position with less line authority and more flexibility over amount and location of work with a smaller salary might have been beneficial to all parties. It's hard to be certain though. Look at athletes--are the Yankees a great argument for keeping oldsters around? What athlete, other than Sandy Koufax who is sui generis, ever retired too young? None of us is eager to admit that the young whippersnappers are smarter and has better ideas than we do.

[John Smith]

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