Business / Economy

Tax-free gifts unlocking retiree savings

New initiative exempts lump sums to children for schooling expenses

by Mayumi Otsuma and Keiko Ujikane


Shoko Iwasaki looked for years for a tax-free way to pass down a lifetime of savings to her grandson. Prime Minister Shinzo Abe has offered the 71-year-old an answer with a program now helping unlock pensioners’ hoarded wealth.

“I’m so grateful for this tax measure, which enables me to hand over my money all at once,” said Iwasaki, who lives alone in Ashiya, Hyogo Prefecture. She plans to endow ¥15 million for the education of her grandson under an initiative introduced this year exempting tax on lump-sum gifts to children for schooling expenses.

Potential transferable assets to the younger generation under the program that lasts through 2015 amount to ¥117 trillion, according to estimates by Goldman Sachs Group Inc. Gifts of just 10 percent of the total could see ¥4 trillion a year trickling down — an amount equivalent to 1.7 percent of annual consumer spending in the world’s third-largest economy.

With the shrinking and aging population leaving companies reluctant to invest at home, added impetus to consumption would help Abe’s campaign to strengthen domestic demand. Any bump in spending resulting from the act also could diminish the blow from the consumption tax increases that start in April.

“This tax exemption is a significant idea in terms of tapping seniors’ money — which is mostly in a dormant state,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. “This is one policy that will support the success of ‘Abenomics.’ “

Since Abe came to power last December, his policies have helped weaken the yen 18 percent against the dollar and lift the Topix stock index 57 percent.

Grandparents or parents can deposit money in accounts at trust banks or other financial institutions opened for tax-free donations exclusively for education. The education expenses for their grandchildren or children include tuition and fees for dormitories, cram schools, music and sports lessons and textbook purchases.

The measure saw about ¥260.7 billion deposited into 40,162 contracts as of Sept. 30, according to the Trust Companies Association of Japan.

Households with heads aged 70 or older have an average of ¥21.97 million in savings, compared with ¥5.67 million for those in their 30s, government data show.

Senior households only account for 28 percent of overall consumption, while households headed by people aged 30 to 59 make up 55 percent, according to Goldman Sachs.

“The program is just like digging a channel to let water flow,” said Shigeki Morinobu, a former director of the Finance Ministry’s Tax Bureau and currently a professor at Chuo University’s law school in Tokyo. “Money hoarded by seniors is likely to start flowing.”

The trust bank association has urged the government to expand the program beyond tax breaks on education expenses to include marriage, childbirth and child-rearing costs. Such gifts could give younger households more scope to spend on housing, durable goods and leisure.

Bank of Japan Gov. Haruhiko Kuroda’s campaign of unprecedented monetary easing helped spur four straight months of price increases through September.

With the sales tax slated to rise to 8 percent in April, retail sales face the prospect of some volatility in coming months. Outlays fell 1 percent in October from the previous month, a government report showed — a sign households may be saving up for a burst of purchases ahead of the higher levy.

The tax on inheritances ranges from 10 percent to 50 percent, with estates with a taxable value of more than ¥300 million paying the highest rate.

The initiative encouraging older generations to pass on their savings does nothing to address the looming challenge of a shortfall in funding for less-wealthy retirees. The nation’s social security bill will balloon to 12.9 percent of gross domestic product next year, according to the International Monetary Fund.

“The government has to overhaul the system,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “It should put more focus on how to relieve young people’s anxiety over the future rather than how it can tap money held by seniors.”

Before the program’s introduction, the most a person could pass on tax-free was ¥1.1 million per year — above that the levy on gifts ranges from 10 percent to 50 percent.

Once she receives a cash payment she is waiting for, Iwasaki, the pensioner from Ashiya, will pass on the new maximum of ¥15 million to her grandson, who is in the second grade at a Tokyo elementary school.

“It’s great you can now pass on so much in a lump sum,” she said. “My family will be able to spend it straight away.”

People aged 65 or older account for 24.5 percent of the population, up from 18.8 percent a decade ago, data from the Statistics Bureau show.

“Money languishes with the elderly, and people in their 80s are leaving fortunes to their children in their 60s,” said Azusa Kato, an economist at BNP Paribas. “This kind of inheritance doesn’t stimulate consumption. It’s necessary to speed up transfers.”

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