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).

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