Business / Economy

Fear of retirement poverty drives Japanese to private pensions

by Keiko Ujikane and Shingo Kawamoto

Bloomberg

Japanese households are rushing to private retirement products after a government report fueled fears that the national pension system won’t be enough to support them during old age.

SBI Securities Co. and Monex Group Inc. have seen applications for defined contribution pension plans surge since the report was released in early June. The document, published on the Financial Services Agency’s website, sparked angst after showing that a couple in their sixties may need as much as ¥20 million ($186,000) on top of their public pension to cover living expenses.

Governments around the world are grappling with how to sustain retirement systems as their populations age and interest rates plummet. The problem is most acute in Japan, where people live longer than almost anywhere else and remain averse to investing more of their $17 trillion in financial assets, despite earning virtually zero interest in bank accounts.

Now, nervousness over the future of the pension system is prompting some to finally take action, providing an unexpected boon to local securities firms.

“The ¥20 million issue is a tailwind for us,” said Ryugo Hashimoto, who heads the investment trust and fixed-income department at SBI Securities. “The era of 100-year lifespans is approaching, and so people are becoming aware that they may have a retirement savings shortfall that they need to prepare for.”

Tomoko Minegishi, a 47-year-old school teacher’s aide, is among people who are considering an individual-type defined contribution pension plan known as iDeCo.

“I’m concerned whether our public pension benefits will be sufficient,” Minegishi said. “I don’t think my salary will rise much, so I want to save on taxes” through iDeCo, she said.

Similar to 401(k) plans in the U.S., under iDeCo people pay a fixed amount each month to make long-term investments in financial products such as funds that buy stocks and bonds. Contributions are tax deductible.

The number of applications for iDeCo accounts at SBI and Monex increased about 50 percent in June and July from May, according to the two online brokerages. Overall, new enrollments rose 8.5 percent from a year earlier to 36,778 people in July, data from the National Pension Fund Association show.

Applications for a small-lot, tax-free investment program called the installment-type Nippon Individual Savings Account also increased in June and July from May, SBI and Monex said.

Japanese workers are among the worst prepared for rising life expectancy because of their tendency to hoard cash savings rather than invest, a World Economic Forum report showed in June. Households in Japan have 53 percent of their financial assets in cash and deposits, compared with 13 percent in the U.S. and 34 percent in the euro area, Bank of Japan data show.

One key to sustaining the recent spate of investment is boosting financial literacy, according to Hiroaki Muto, chief economist at Tokai Tokyo Research Institute Co. in Tokyo. Japan hasn’t provided enough financial education programs at schools, and people remain deterred from investing after the nation’s asset-price bubble burst in the early 1990s, he said.

“There’s a myth that savings are the safest and stocks are seen as gambling,” Muto said.

To avoid a tough retirement, more people like Minegishi may find that it’s a punt worth taking.

“To supplement my pension, I think I’ll have to work as long as I can,” she said. “I’m worried if we’ll be OK.”

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