Pension Performance 🗾

The future of Japan's national pension (国民年金/Kokumin Nenkin), and that of Japan.

Japan is at the vanguard of indebted aging societies, so there's a lot of debate about whether it's going to be OK, seeing as more than a few developed nations will also Japan-ify.

Team "Prep for Armageddon" points to the huge national debt. Team "Shrug" points to that debt being overwhelmingly yen-denominated and domestically held.

If indeed each Japanese citizen is owed 9 million yen (about USD90,000) what realistic claim do they have to it? Because how they might access it has ramifications not just for citizens, but the future of the country.

That's what we're here to tease out.

"Nooo! More debt will just debase the currency!"

Old-Age Basic Pension Basics:

• 2021 Monthly contribution: ¥16,610
• 2021 Maximum Benefit amount (annual): ¥780,900
• Years of Full Contribution required to receive Maximum Benefit: 40
• Entitlement Age: 65

Let's grab some demographics to flesh out the value in that annuity.

• Japan present day Median Age: 48.4
• Median birth year: 1972
• Life expectancy for cohort born on median birth year: 73.507

What this means is that middle-of-the-pack Japanese will have about 8.5 years of drawing on the pension.

If you've calculated that 8.5 years of max benefit is less than 40 years of paying in monthly contributions, then well spotted!

The implied rate of return for the maximum pension over 48.5 years is -0.75% per annum.

Getting back less than you put in has ramifications for the economy. As more workers become retirees, not only will their spending habits change, they will have less to spend. Less money chasing the same level of mass production sets the stage for deflation.

Caveats and Counterpoints

The monthly contribution and maximum benefit have changed over time, but this does not demolish the deflation argument because they have historically both roughly increased in tandem.

Life-spans are increasing, as are payouts. Using a 2019 life expectancy of 84.356 years brings the rate of return to around 2%. While not negative, this pales in comparison to investments denominated in other reserve currencies. To compare, the S&P 500's real historical returns are around 7%. A burning desire to consume in pensioners is hardly going to be ignited at 2%, which is more likely to evince a feeling of merely treading water. This apparent underperformance reflects less upon Japan's asset managers and more on the national pension being mainly funded through a potentially shrinking tax base.

Kokumin Nenkin is intended to supplement other income and social spending, diluting the weakening payouts. Japan heavily subsidises medical and aged services which would otherwise blow larger holes in elderly wallets, and many Japanese indeed receive the bulk of their retirement income from employer pensions (厚生年金 / Kōsei Nenkin). 

However, a growing majority do not.

According to the welfare ministry survey, public pension benefits account for 67 percent of the annual income of elderly households, and 56 percent of the pensioners say they have no other means of income. But the amount of pension benefits is set to decline as the number of working-age people who support the system shrinks with the aging of Japan’s population and fewer births.

(Source: Japan Times)

Disabuse yourself of the notion that Japanese pensions are as lavish as Western ones. Most Japanese pensioners receive a maximum income of USD $8,000 a year, replacing less than 40% of a full time salary, far below 2020's OECD average net replacement rate of 62%. 

Japan's government will likely remain solvent drip-feeding money out at that rate, but that will do little more than keep recipients' lights on, let alone spur runaway inflation.

The yen buys more these days. The JPY-USD exchange rate has appreciated at just over 1% annually from 1989 to 2020. However, trade protectionism limits consumers' ability to expend the stronger yen on cheaper imports. Rather than the exchange rate boosting the pension from 'sufficient' to 'generous', it highlights how its present-day meagreness was previously even more paltry.

Will this Japan-ification spread?

Not exactly. Japan has proven culturally rare in its ability to convince older cohorts to 'take the hit for the team'. In most other developed countries, the politically potent elderly will cry blue murder at any hint that their spending power is being eroded. Politicians will accommodate them through higher national debt and higher taxes on non-retirement incomes, while at the same time retaining tax concessions for assets and income streams primarily held by the elderly.

This does not mean that inflation is locked in. Disinflation or deflation may still occur in the developed world, just not led by the elderly keeping their wallets shut.

It may be younger folk, less shielded from price and income ... flexibility ..., who refrain from spending. Particularly on items - like housing or vehicles - that are prone to bidding wars against older cashed-up compatriots.

Back to Japan though, it would seem that the government will find it easy to meet the pension obligations that it runs record debt and deficits for.

Perhaps too easy.