‘I Can’t Rely on the Country’: Why Japan Is Turning to Riskier DIY Pensions

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Reuters

@FortuneMagazine

July 20, 2016, 12:29 AM EDT

When Saori Ito went on maternity leave last year and stopped getting a regular paycheck from her cosmetics company, she became worried about her future – and wondered if this kind of anxiety is what awaits her after retirement.

The 34-year-old married mother of a one-year-old girl had doubts about the government’s ability to fund retirement for Japan’s growing ranks of elderly in the world’s oldest population.

So she set up a private, self-managed pension account.

“How I see it is that the government won’t be able to pay that much in pensions anymore, so it’s telling us, ‘Go take care of it yourself. We can’t do it for you,'” Ito told Reuters at a Tokyo cafe.

Japan’s government loosened laws on pensions in May, allowing almost all working-age Japanese to join private defined-contribution retirement plans – similar to individual retirement accounts (IRAs) in the United States that allow workers to make regular contributions to an investment fund with tax breaks.

Ito has invested half her money in foreign stocks and bonds and half in domestic stocks and bonds – she said she learned about diversifying her assets at a personal finance seminar.

That’s good news for Japan’s Prime Minister Shinzo Abe, who wants Japan’s risk-averse savers to pour more of the country’s huge financial assets into higher-yield investments.

Despite the Bank of Japan’s decision in January to slash interest rates below zero to boost investment, more than half of the $16 trillion in Japanese household assets are still either in bank deposits or cash, compared with 13.8% for the United States.

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BOOST TO EQUITIES

Starting next January, 27 million Japanese, including housewives and civil servants, will be newly eligible to set up private defined-contribution pension accounts. Currently, only the self-employed and workers who don’t have corporate-sponsored pension plans can set up private pension accounts.

It’s already proven something of a hit with the public. Since the law reform passed parliament in May, monthly web access to the 401k Educational Society, a non-profit that promotes defined-contribution pension plans, has surged seven-fold to 42,000, said Kayo Oe, the group’s chief researcher.

The change has the potential to attract as many as 9.4 million new users over time from 257,000 now, and generate an annual capital flow of up to 1 trillion yen ($9.46 billion) into the private-pension sector, according to Nomura Research Institute (NRI).

Financial institutions such as Nomura Securities Co , SBI Securities Co, the Bank of Tokyo-Mitsubishi UFJ, and Sumitomo Mitsui Banking Corp now offer private pension plans and could benefit from a significant expansion in this market.

See also: California’s Pension Funding Crisis Just Got Worse

Around 18% of private-pension money was invested in domestic and foreign equities, and 39% in savings and deposits as of March 2015, according to the Japan Defined-Contribution Pension Plan Administration. By contrast, Japanese households during the same period invested just under 10% of their assets in equities and kept over 50 percent in cash and deposits, according to Bank of Japan data.

“I know the risk isn’t zero,” said a 37-year-old Japanese businesswoman who is applying for a private pension account. “But if I don’t take a risk, my money won’t increase. I need to take some level of risk and I accept that.”

The woman, who works at a company in eastern Tokyo, said she plans to invest more in stocks than in debt, with a focus on foreign equities including those from emerging markets. She is new to investing, and reads blogs and articles on personal finance and attends seminars about investment to decide what assets to choose, she said.

“I’m more at ease taking care of my own money than doing nothing and leaving it all to the government,” she added. “Doing nothing is much more risky.”

DEMOGRAPHIC DILEMMAS

Japan’s demographic data reinforces her concerns.

Just over a quarter of Japan’s population is aged 65 and over and that number is projected to rise to a third by 2035, according to Japanese government data.

Japan’s birthrate has been declining for years and hit a record low of eight births per thousand in 2014. That means fewer workers to support the ever-expanding population of elderly: The number of people in the workforce is expected to decline by about 20% to 63.4 million in 2035.

Those under 40 will pay far more into the state pension scheme over their lifetimes than did their elders, according to data from Japan’s Ministry of Health, Labour and Welfare.

Current 70-year-olds will receive five times more in benefits than what they paid into the system. Current 20- and 30-year-olds, however, will receive only around twice the amount they will have paid the state.

This is fuelling concerns among working-age Japanese they could be left high and dry once they hit retirement.

“I can’t rely on the country for my well-being. That’s impossible,” Yuko Narita, a 48-year-old mother and housewife, told Reuters.

Narita set up a private pension account last December, in part because she discovered she would receive just 100,000 yen per month in retirement benefits, even after working for 20 years at an insurance company, she said.

A typical retired couple today receives around 220,000 yen a month, and over 80% of the population thinks state retirement benefits already are not enough to live on, according to a survey by Japan Institute of Life Insurances.

“I can’t live on just 100,000 yen,” Narita said.

TRUSTING PUBLIC PENSIONS

To be sure, government pensions will remain the backbone of retirement funding. Only those who pay state pension fees are eligible to set up private pension accounts.

“The welfare ministry is in a difficult position – it will not and cannot say, ‘public pensions are in trouble and you won’t be receiving much,'” said Hideyuki Morito, a member of a government panel on pensions and professor of law at Keio University.

“The government needs to sustain trust in public pensions, although it’s clear people will no longer be fine if all they have is public pensions,” he added.

How companies are making employees save for retirement

@FortuneMagazine

October 15, 2015, 8:04 AM EDT

With company-sponsored pensions now mostly a thing of the past, businesses are trying to force their workers to put more of their money into 401(k) plans. To do that, some companies are inching up the percentage of new hires’ salaries that are automatically placed into retirement accounts.

In the past, 3% was the default amount to deduct from employees’ paychecks for 401(k) savings. But in 2014, 39% of company plans deducted more than that from workers’ salaries, up from 27% of plans in 2005, according to Vanguard data cited by The Wall Street Journal. Google GOOG , Apache and Credit Suisse CS have been among the businesses pushing workers to save more.

Corporations have many reasons for compelling workers build up their nest eggs. Offering a large match on retirement contributions is a lucrative employee benefit that can be used as a recruitment tool. Getting workers to think about retirement now will also help get them out the door when they’re old. That way, companies can more easily refresh an aging workforce with young employees.

These companies still aren’t really offering their workers a true safety net. They’re just encouraging employees more to build one for themselves. Despite these efforts, 40% of working households with people between the ages of 25 and 64 haven’t saved anything for retirement, according to the National Institute on Retirement Security.

This is why Millennial women are saving half as much as men

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Reuters

@FortuneMagazine

June 24, 2015, 2:39 PM EDT

Here’s the good news: Millennials—both men and women—are putting money away for retirement, an average of 8% of their annual salaries, according to a new survey by T. Rowe Price. Now for the not-so-good news: Millennial women are already trailing their male counterparts when it comes to 401(k) savings. For women ages 18 to 33 participating in a 401(k), the median 401(k) balance is $11,000—but for men in that cohort it’s twice as much: $22,000.

The numbers don’t get any better after that. Millennial women are contributing a median of 5% of their annual salaries to their 401(k) plans, versus 7% for Millennial men. And those annual salaries are smaller: The median personal income for Millennial women is $48,000, while men are earning $63,000.

“I can’t say that we’re surprised,” says Anne Coveney, T. Rowe Price’s senior manager of Retirement Thought Leadership. “I think it’s pretty well established in this country that there is a pay gap. A key contributing factor is that women tend to work in different professions, so I think we’re seeing some of that come through in our study.”

There are certainly work differences between genders in T. Rowe Price’s sample. For instance, 16% of the women surveyed work part-time, compared to 11% of the men. And 20% of women are in their first year at their current job, versus 15% for Millennial males.

Millennial women are also deeper in debt, carrying $20,000 in student loan debt versus $14,000 for men. That alone may make it tougher to sock money away for retirement. “Women are saving a bit less, but we know that they are making a bit less than men,” Coveney says. “And we also know they’re dealing with debt. When you look at how people are saving, it seems to be quite linked to their circumstances overall.”

Last year, a study by Wells Fargo found that only half of Millennial women have started saving for retirement, compared to 61% of Millennial men. And they’re not happy about it—six out of ten women said they weren’t satisfied with their savings level. Although the same number of men and women in the research reported living paycheck to paycheck—so both genders were equally strapped—it may be that women are less certain about how to proceed financially.

“Women are overall less confident in their ability to save for their future than men are, so that influences the way they think about their finances going forward, and starting from a very young age,” says Elli Dai, Wells Fargo’s senior VP of Participant Services.

For instance, a recent FINRA study found that only 18% of Millennial females demonstrated high financial literacy, compared to 29% of males. And in the Wells Fargo study, 70% of men said the stock market is the best place to save for retirement, while only half of women said the same thing. “That’s pretty significant when you’re talking about a young generation that has a long time horizon,” Dai says.

Ironically, although women are making less, they’re more educated than ever. About 36% of women ages 25 to 34 hold a bachelor’s degree or higher, according to data from the Institute for Women’s Policy Research. For men in the same age range, the number is 28%. “The trend seems to be that younger women are considerably more likely than younger men to go to college and get a degree,” says Cynthia Hess, IWPR’s study director. But in every state except for one (New York), younger women earn less than younger men.

One thing to remember, of course, is that where there are women, there are often children. One of the things IWPR researchers noticed was that although Millennial women are more highly educated than men, they also have a much higher poverty rate. “That is likely due to the fact that Millennial women are of childbearing age, and some are supporting children on their own,” Hess says. “So that makes it more difficult to achieve economic security.”

It could also be that women taking time off to have children aren’t able to save as much money to their 401(k)s as men who work straight through and enjoy years of compounding. According to the IWPR, the percentage of Millennial women in the labor force is 68%, compared to 73% for men. “Five percentage points is still pretty substantial,” Hess says.

On the whole, Millennial women’s 401(k) balances aren’t suffering for one reason—but a handful of them. “More Millennial men are saving for retirement than women, and those that are saving are saving at a higher rate,” Dai says. “When you add that men are earning more than women and you put all of that together, it really sets the stage for that significant difference in savings overall.”

Why Gen Xers are saving more for retirement than boomers

by
Reuters

@FortuneMagazine

June 23, 2015, 12:59 PM EDT

If the Great Recession had any positive result at all, it’s this: Watching the world’s economy stumble, and entire industries crumble, has inspired most people to get serious about socking money away for retirement, instead of putting off saving or leaving it to chance.

“One outcome of the Great Recession is that we’re seeing meaningful changes in financial behavior, especially in the Gen X age group,” says Celandra Deane-Bess, senior wealth planner for PNC Wealth Management and chair of PNC’s national retirement practice. Her team recently surveyed 1,017 U.S. adults with investable assets of at least $50,000 and found that “the recession was a game changer. One of the hardest things is getting people to change their habits, but there has been a real shift in both spending and saving.”

Gen Xers, defined as people ages 35 to 49, are markedly more likely to be putting more of their current income aside for later than are Baby Boomers, partly because the younger cohort is more scared of running out of money in their golden years. Almost three-quarters (73%) of Gen Xers polled agreed with the statement, “I worry that my savings may not hold out for as long as I live,” while only 55% of Boomers agreed.

That worry is well-founded, partly because Gen X entered the workforce just as defined-contribution plans, especially 401(k)s, were replacing the old defined-benefit pension plans, which have all but vanished. So Boomers may get a smaller payout than they’d be due if the old plans had continued, but at least they’re likely to get something. Partly as a result, 45% of Boomers, vs. 65% of Gen X, agree that “I believe I am solely responsible for my own retirement (no Social Security, employer pension, inheritance, etc.).”

Presidential candidates, take note: The merest hint of any intention to slash Social Security is, now as ever, unlikely to win many votes. Even though Gen Xers seem uneasy about counting on it, 94% of both age groups say they expect those monthly checks to be there when they retire.

Both Gen Xers and Boomers cite health care costs as their biggest retirement worry, and they may be right. “Health care reform has slowed the rate of growth in costs,” notes Deane-Bess. “But those costs are still growing at a faster rate than inflation. Then too, life expectancy is increasing, and the longer you live, the bigger the share of your budget that will have to go to health care.”

That’s one reason Deane-Bess is skeptical of Gen Xers’ intention to retire somewhat earlier (age 63, on average) than Boomers, who mostly plan to hold out until at least age 65. Slightly more than half (51%) of Gen Xers are spending less and saving more than before the downturn, vs. 37% of Boomers who say the same.

Will that behavior continue once the shock of the Great Recession has worn off? Deane-Bess believes it will. The economy went into a tailspin just as many Gen Xers were moving into the prime years of their careers, and “they were young enough that it made a lasting impression. They now see firsthand what it’s like to lose a job, or a home, or both,” she says. “Fear of the unknown is one thing, but fear of the known is even more powerful.”

Grow up and vote!

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Reuters

@FortuneMagazine

November 4, 2008, 4:03 PM EDT

What a day, right? I’m on my way to vote and, frankly, I look a little crazy because I’m so excited that I hardly slept a wink. And it isn’t difficult to see why. So much of the Gen Y discussion we’ve had over the last year or two has been about our entitlement, our coddled youth, our lack of accountability, perspective, and work ethic. Our generation, I’ve been told so many times, hasn’t really been through anything. (Sure, there was 9/11, but could that one day compare to prolonged coming-of-age crises like Vietnam or the Great Depression?)

Well, I think it’s about time we put that argument to rest. Maybe two wars and $4-a-gallon gas this summer weren’t enough to get us the generational street cred, but surely the last few months have finally elevated us to that highest echelon of suffering. As Thomas Friedman put it in his column on Monday, “Never has one generation [i.e., them] spent so much of its children’s [i.e., us] wealth in such a short period of time with so little to show for it as in the Bush years.” Thanks, Mom and Dad.

And for the record, it’s only just beginning. Whatever entitlement we have exhibited will, I think, be quickly quashed by the rapidly approaching obligations of our future. Not only will it cost far more (and be much more necessary, given the competitive landscape) to put our kids through college and beyond, we will also be caring for parents who are living longer and saving less, often because of the circumstances they’ve faced, like layoffs, rising healthcare costs, and of course, the high price of raising us.

All that to say, please, for the love of goodness, go vote. Whatever the immediate stakes for our country, the long-term significance of this day for us simply can’t be overstated. When sociologists look back at the formative moments of our lifetime, will 2008 be the year whose financial crisis began all our troubles, or the one whose election set the tone for our country’s recovery? Every election, there’s big talk of the youth vote, and just about every election, it amounts to a big pile of hype. (Howard Dean, anyone?) So this year, think of it as a life vote. Whatever your views, whomever you support, you actually do have a chance to shape the rest of our collective life today. Take it. Or don’t — and your friends (and I!) will hold you personally responsible for every calamity that befalls us forever more.

You can’t put a latte in the bank

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Reuters

@FortuneMagazine

June 5, 2007, 3:46 PM EDT

If you haven’t checked out Damon Darlin’s column from this weekend (or your parents haven’t sent it to you already!), it might be a good idea to give “Your Money: More Advice Graduates Don’t Want to Hear” a look. Lots of you’ve written me to say you want to hear more about how to save and spend, so there’ll be much more to come about it on The Gig. But it seems from what Darlin says that, as interested as we are in theory, many of us don’t necessarily want to make the sacrifices to put good saving advice into practice — especially the advice he gave in a much e-mailed column around graduation time last year.

All in all, the recommendations were pretty straightforward: “It was mostly the simple things my mother had drummed into me,” he writes. “It was advice like diverting 10 percent of your income to savings before anything else and ignoring raises and putting them into savings, too. Learn to cook, I said, and never borrow money to pay for a depreciating asset. I also suggested cutting out the latte habit, which was my symbol for those little things in life that when turned into a habit, add up to money that could have been spent on something worthwhile and memorable.”

Apparently, the latte is sacred to some of us. And others said that putting aside 10% — which Darlin estimates works out to $52 a week for someone making $40,000 a year — is a stretch, particularly for those living in cities like New York. (A publicist in Atlanta once told me that for what I paid to live in a sixth-floor walk-up in Manhattan’s West Village, I “could have Ludacris’s house” down there.)

But the benefits are many. “Bank $250 a month for 40 years in a I.R.A. or a 401(k) and you will receive about $500,000, assuming a 6 percent return,” Darlin writes. “Start at age 45 and you would have to put in $1,078 a month to generate the same amount by age 65.”

Seems like a no-brainer. And while the pressures of big-city rent, hanging out, and all the other things we sometimes feel we’d die without are also numerous, I’d hazard a guess that money in the bank will mean more to our 65-year-old selves than designer shoes, ginormous TVs and other indulgences mean to us now. (Really, how many times have I heard a female friend here say she forsook saving, food, or even rent for a pair of shoes she just had to have? You laugh, but it happens here more than anyone would like to admit. I’m ashamed for all of us.)

Bottom line: Let’s keep dutifully saving — with automatic deductions, of course, so we can’t cheat as easily — if at all possible. Doable, or not so much?

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