[Feature: Will Investment Change Society?] Kenichi Kobayashi: The Aging Society, Employment, and the Current State of Investment

2023/04/05

In June 2019, the Financial System Council published a report by its Market Working Group titled "Asset Formation and Management in an Aging Society*1." The report stated that for unemployed couples where the husband is 65 or older and the wife is 60 or older, the average monthly shortfall is approximately 50,000 yen. It noted that "if they have another 20 to 30 years of life, the total shortfall would be 13 to 20 million yen by simple calculation."

In response, then-Deputy Prime Minister and Minister of State for Financial Services Taro Aso stated that he would not accept it as an official report, saying it was "different from the government's stance." Toshihiro Nikai, then-Secretary-General of the Liberal Democratic Party, lodged a stern protest with the Financial Services Agency, and Natsuo Yamaguchi, leader of Komeito, also remarked, "The explanation is far too insufficient. I want to urge serious reflection."

While it is unusual for a council report not to be accepted, this occurred against a backdrop of political tug-of-war between the opposition parties, who sought to make it an issue in the Upper House election scheduled for the following month, and the ruling parties, who tried to respond quickly to deflect criticism. Although the Upper House election ended in a victory for the ruling coalition, the uproar surrounding this report undoubtedly increased public interest in the household finances of the elderly.

In this article, I would like to organize the current state of post-retirement life for the elderly and consider the challenges for investment to take root in Japanese society.

Regardless of generation, the most concerning aspect of post-retirement life is likely "when one's life will end." According to the Ministry of Health, Labour and Welfare's "Life Tables*2," average life expectancy over the past half-century has risen from 69.31 years (1970) to 81.56 years (2020) for men, and from 74.66 years to 87.71 years for women. During this period, life expectancy increased by 12.25 years for men and 13.05 years for women.

Although the rate of increase in life expectancy has slowed, a comparison between 2020 and 2015 shows that life expectancy for both men and women increased by nearly a year. Furthermore, according to estimates by the National Institute of Population and Social Security Research*3, average life expectancy in 2065 is expected to be 84.95 years for men and 91.35 years for women.

The background to the increase in average life expectancy for both men and women is the decline in mortality rates from "pneumonia" and "cerebrovascular disease," which for many years accounted for a large number of deaths among Japanese people. According to the Ministry of Health, Labour and Welfare's "Vital Statistics Monthly Report (Annual Total)*4*5," the proportions of major causes of death in 2011 were "cancer" (28.5%), "heart disease" (15.5%), "pneumonia" (9.9%), "cerebrovascular disease" (9.9%), and "accidental accidents" (4.8%).

By 2021, this changed to "cancer" (26.5%), "heart disease" (14.9%), "senility" (10.6%), "cerebrovascular disease" (7.3%), and "pneumonia" (5.1%). While "cancer" and "heart disease" remain high, "senility," which previously had a low mortality rate, has moved up the rankings, surpassing "pneumonia" and "cerebrovascular disease."

Senility refers to the natural death of elderly people where there is no other cause of death to be recorded. Against a backdrop of improvements in hygiene and nutrition, deaths not caused by disease are increasing. While disease often takes the lives of younger generations, "the decrease in deaths from disease is extending average life expectancy" (Professor Akira Babazono, Kyushu University).

As things stand, as Linda Gratton and Andrew Scott pointed out in "The 100-Year Life: Living and Working in an Age of Longevity," life is far too long to live on savings after working until the traditional retirement age. The negative aspects of the "100-year life era" have suddenly attracted attention.

Along with the increase in average life expectancy, healthy life expectancy—the period during which one can be active in good health—is also increasing. In the "Healthy Life Expectancy for the First Year of Reiwa (2019)*6" announced by the Ministry of Health, Labour and Welfare in December 2021, healthy life expectancy as of 2019 is estimated at 72.68 years for men and 75.38 years for women. On average, both men and women can spend their daily lives without health-related obstacles until their early 70s.

Increased longevity, which extends average life expectancy, amplifies anxiety about retirement funds, but it is not entirely negative. Healthy life expectancy is extending, and employment among the elderly is also increasing. If the period of working is extended, there is a positive side in that the amount of savings withdrawn for post-retirement living expenses can be reduced.

According to the Ministry of Internal Affairs and Communications' "Labour Force Survey*7," the employment rate for those aged 65 and over in 2022 was 34.2% for men and 18.3% for women. The total for both men and women was 25.2%, an increase of 5.7 percentage points compared to ten years ago. Looking at the combined employment rate by age group, it was 50.8% for ages 65–69, 33.5% for ages 70–74, and 11.0% for ages 75 and over.

According to the National Tax Agency's "2021 Statistical Survey of Actual Statistics for Salary in the Private Sector*8," the average salary for the "65–69" age group was 3.382 million yen, and for "70 and over" it was 3.002 million yen. Average salary gradually increases from 1.326 million yen for "19 and under," peaking at 5.29 million yen for the "55–59" age group. Those aged "65–69" earn over 60% of the peak, and those "70 and over" earn just under 60%.

The rising employment rate for men and women aged 65 and over works positively for elderly household finances. However, not all changes surrounding employment are positive. It should be noted that corporate retirement benefit systems—so-called retirement allowance systems—which have traditionally been a pillar of retirement funds alongside public pensions, are on a downward trend.

According to the Ministry of Health, Labour and Welfare's "General Survey on Working Conditions*9," comparing the retirement benefit amount per university/graduate school graduate retiree with 20 or more years of service and aged 45 or older, the average benefit in the 2018 survey (17.88 million yen) was 1.53 million yen less than the average benefit in the 2013 survey (19.41 million yen).

Changing jobs has become common, and some point out that the traditional compensation system—where young employees endure low salaries in exchange for a large retirement allowance at the end of their career—has already collapsed. If retirement allowance systems shrink further in the future, the working generation will likely need to rethink their plans for forming retirement funds.

While healthy life expectancy is extending and the number of workers aged 65 and over is increasing, as people age, some become unable to work even if they wish to, due to injury, illness, nursing care needs, or declining physical strength. For such people, public pensions like the National Pension and Employees' Pension, for which they paid premiums while working, become the economic pillar of post-retirement life.

The amount of pension the working generation can receive in the future can be checked via the "Nenkin Teiki Bin" (Pension Coverage Regular Notice) sent by the Japan Pension Service during the subscriber's birth month. Here, based on the "Overview of Employees' Pension Insurance and National Pension Business" compiled by the Ministry of Health, Labour and Welfare, we introduce the average profile of how much pension recipients are receiving from the National Pension and Employees' Pension.

According to the Ministry of Health, Labour and Welfare's "FY2021 Overview of Employees' Pension Insurance and National Pension Business*10," the average monthly pension for the National Pension (joined by self-employed individuals and full-time homemakers) was 56,479 yen. The average monthly pension for the Employees' Pension (Category 1, joined by company employees) was 145,665 yen, including the Basic Pension for the Elderly.

Applying these average monthly pension amounts to a two-person couple household, the monthly pension amount would be: a total of approximately 291,000 yen if both were Employees' Pension recipients in a dual-income household; a total of approximately 202,000 yen if one spouse was on Employees' Pension and the other on National Pension; and a total of approximately 113,000 yen if both were on National Pension.

According to the Ministry of Internal Affairs and Communications' "Population Estimates as of October 1, 2021*11," Japan's total population was 125.5 million, a decrease of approximately 640,000 from the previous year. By age, the population "under 15" was 14.78 million (down approx. 250,000), and "15–64" was 74.5 million (down approx. 580,000). Meanwhile, the population "65 and over" was 36.21 million, an increase of approximately 190,000.

Japan's population pyramid has shifted from a "Mt. Fuji type" (high birth and death rates) to a "bell type" (low birth and death rates), and then to an "urn type" (low birth rate and advanced aging). Consequently, concerns have been raised that public pensions might face financial collapse due to the shrinking labor force and the growing elderly population.

In response, the government fixed the upper limit of public pension premium burdens to ensure they do not become excessive for the working generation, and introduced the "macroeconomic slide*12" to adjust public pension benefit amounts. Even as the birthrate declines and the population ages further, the macroeconomic slide lowers the level of public pension benefits so they can be covered within the scope of available financial resources.

The macroeconomic slide "lowers the level of public pension benefits by taking into account the decrease in the number of insured persons and the future extension of average life expectancy" (Professor Makoto Kimura, University of Hyogo). In phases where wages and prices rise, it reduces the real level of benefits by keeping the increase in public pensions small.

Comparing the average monthly pension of the National Pension and the Employees' Pension, the Employees' Pension, which has a larger premium burden, has a higher average monthly pension. Even so, the standard income replacement rate for a single-income couple is aimed at 50% or more in the future. In other words, the role that can be expected of public pensions is inherently limited.

So far, we have looked at trends in average life expectancy, employment rates for the elderly, and average monthly public pension amounts. While there are causes for concern, such as the lowering of benefit levels due to the macroeconomic slide, there are also reassuring factors, such as the rising employment rate of the elderly. What is the actual state of elderly household finances?

According to the Ministry of Internal Affairs and Communications' "Family Income and Expenditure Survey*13," for households where the head is 65 or older and employed, the average monthly real income was 455,469 yen, and average real expenditure was 352,900 yen, resulting in a monthly surplus of 102,569 yen. Here, the rising employment rate of the elderly is steadily working in their favor.

On the other hand, for households where the head is 65 or older and unemployed, the average monthly real income was 248,858 yen, and average real expenditure was 271,524 yen, resulting in a monthly deficit of 22,666 yen. It is thought that people respond to this monthly deficit by drawing down savings, but if this continues for decades, retirement funds will become precarious.

In Japan, where average life expectancy has increased, post-retirement life is more stable if one works as long as possible after retirement. On the other hand, if there are reasons to retire early, such as injury, illness, nursing care, or declining physical strength, it is necessary to constantly consider how to form retirement funds that can withstand longevity risk.

According to the Central Council for Financial Services Information's "Financial Literacy Survey*14," when respondents were asked, "Have you ever invested an amount exceeding one month's living expenses in the past?", the proportion of people who answered "I conducted asset management" was 26.9%, while the proportion who answered "I did not conduct asset management" was 73.1%.

Although the proportion of people who answered "I conducted asset management" has risen by 1.4 percentage points compared to three years ago and 2.1 percentage points compared to six years ago, the proportion of experienced investors remains low, suggesting an attitude of trying to avoid investments that involve the risk of asset fluctuations as much as possible.

This is partly because elderly people aged 60 and over, who hold over 60% of personal financial assets, must avoid significant depletion of retirement funds and are not suited for high-risk investments. Additionally, the sales practices of financial institutions, which are often perceived as "just selling products that are convenient for themselves," are being avoided.

To form retirement funds, it is necessary to direct surplus funds into investment and accumulate profits while minimizing losses. To achieve this, being sensitive to the risk of asset fluctuations is essential. So, specifically, what should one do to be sensitive to risk?

Savings, foreign currency deposits, government bonds, corporate bonds, stocks, investment trusts, life insurance—there are a wide variety of financial products for investment. "The first step is to properly investigate safety, liquidity, and profitability" (Atsushi Kurita, Securities Analyst). Investment should be within the scope of one's risk tolerance, and if it exceeds that tolerance, one must flatly give up on it.

One should also pay attention to the fees of financial products. Generally, the greater the professional involvement, the higher the fee; the smaller the professional involvement, the lower the fee. If fees are too high, it could lead to losing the fruits of the investment. One should carefully examine whether the fees of a financial product are appropriate for the product.

[Postscript] Debates among experts continue regarding the ideal form of social security. For discussions by experts, please refer to the contributed column "Policy Blog," which the author planned and edited as the Web Editor-in-Chief of the Japan Center for Economic Research from September 2018 to March 2022.