Special Speech - · PDF fileSpecial Speech Prospects of Japan ... •--> A lack of a future...

Dr. Kohei Komamura

Professor of Economics, Director of the Research Center

for Financial Gerontology, Keio University

Special Speech

Prospects of Japan’s social security system

and role of public and private pensions

Keywords of the Lecture

• 2017 new population estimates. Continued decline in population/increase in longevity

• The outlook for the social security system reform

• The issues facing the public pension system and verification of the 2019 pension finance

• The roles of public and private pension programs

• Financial gerontology, financial literacy and behavioral economics

2

Frequent Social Security System Reforms and System Revisions • 1: A period of intensive reform toward 2025. Public funds to be concentrated on low-income earners and

healthcare/Long-term care

• 2: Pension continues to be reformed every five years, healthcare, every two years and Long-term care, every three years through meticulous system and fee revisions (healthcare and Long-term care to be revised every six years simultaneously)

• Pension: 2019 and 2024 (ensuring of the pension replacement rate under fixed premium and enhancement of private pension programs and measures against the low-income elderly)

• Healthcare: 2018, 2020, 2022 and 2024, Long-term care (disabled people): 2018, 2021 and 2024: (leading the behavior of business operators and medical institutions by means of rewards, taking measures against Long-term care worker shortage and those against lifestyle-related diseases/Long-term care prevention and dementia)

• Plus joint reform of social security and taxation, social security reform program legislation and additional reform (political conditions, economic/financial conditions, demographics, etc.)

• 3: “When the nation has policy, the people find a way around” --> Does the policy have the public reaction in view?

• --> The government does not eye the whole household economy in a cross-sectoral manner (individual impacts are invisible).

• --> A lack of a future vision and lifelong asset building behavior.

• --> A lack of the elderly’ s perspective (how they feel toward, understand and react to, system reforms or changes in use of systems) (gerontology (psychology) or financial gerontology makes a contribution).

• --> Economic agent, household economy and the elderly’s reaction (savings, consumption, asset building and inheritance).

3

65

70

75

80

85

90

95

Trends in, and Estimates for, Median Longevity

Male Female4

Complied based on Projection: Population & Household by the National Institute of Population and Social Security Research (each year)

New Population Estimates: Continued Extension of Longevity

20

30

40

50

60

70

80

90

100

Survival Rates to the Specified Age (%, Actual Results and Estimates)

Aged 65 (M17) Aged 75 (M17)

Aged 65 (F17) Aged 75 (F17)

Estimates for the Number of Future Deaths (unit: 1,000 people)

1000

1100

1200

1300

1400

1500

1600

1700

1800

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

2056

2058

2060

2062

2064

Estimates for the Number of Deaths (1,000 people)

5

0

500

1000

1500

2000

2500

Actual Number of, and Estimates for, Births (1,000 people)

1975 19801987 19921997 Estimates for 2002Estimates for 2006 Estimates for 2012Actual + Estimates for 2017

Trends in, and Estimates for, the Number of Births (unit: 1,000 people)

Complied based on Projection: Population & Household 2017 by the National Institute of Population and Social Security Research

Around 2040: Society where 1.7 Million People Die and 700 Thousand People are Born

Estimates for the Number of the Elderly Increased Percentages of Those Aged 75 or Older and Women

6

Complied based on Projection: Population & Household 2017 by the National Institute of Population and Social Security Research

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Estimates for Population of those Aged 65 or Older and Aged 75 or Older (unit: 1,000 people) and Percentages of those Aged 75 or Older (%) and Women (%)

Population of those aged 65-74 Population of those aged 75 or older Percentage of women aged 75 or older

Percentage of those aged 75 or older Percentage of women aged 65 or older

The Issues Facing the Pension System and Verification of the 2019 Pension Finance

• 1: Reform implemented in 2016 based on the 2014 pension finance verification

• Resources for the so-called macroeconomic slide formula is on hold in the deflationary phase to be addressed by carry-over

• Expansion in application of employees’ pension to non-regular workers

• 2: Issues identified as a result of the 2014 pension finance verification

• The macroeconomic slide formula to be applied to the basic pension for a period of about 30 years

• --> Sharp reduction in the basic pension benefit levels. An increase in the elderly with low pension payments

• --> Sustainability confirmed in The Financial Report on the Public Pension System Fiscal 2015 by the Pension Actuarial Subcommittee, Ministry of Health, Labour and Welfare

• 3: Discussions in the 2014 pension finance verification

• “Estimated rate of profit --> Estimated real rate of interest” --> Target earnings of reserve --> Government Pension Investment Fund (GPIF)’s base portfolio

• 4: Policy for cooperation between public and private pension programs and diffusion of private pension programs (corporate or personal pension plans)

• Decline in employees’ pension funds

• Enhancement of private pension programs and promotion of enrollment

• Support for low-income earners needed in order to offset the effect of the macroeconomic slide formula on the basic pension

7

Rates of Change of Public Pension from the Current Level and Options

8

down 30%

Source: Compiled based on Data by the Ministry of Health, Labour and Welfare (2015)

Rates of Change for the Basic Pension and Proportional Part

(Case E)

2015

2030

2042 (E

nro

lled f

or

40 y

ears

, A

ged 6

5)

2042 (

Enro

lled f

or

45 y

ears

, A

ged 6

5)

2042(E

nro

lled f

or

47 y

ears

, A

ged 6

7)

2042(E

nro

lled f

or

49 y

ears

, A

ged 6

9)

Rates of Change for the Basic Pension and Proportional Part

(Case H)

down 43%

Rates of change for proportional part Rates of change for basic pension Rates of change for proportional part Rates of change for basic pension

2015

2030

2042 (E

nro

lled f

or

40 y

ears

, A

ged 6

5)

2042 (

Enro

lled f

or

45 y

ears

, A

ged 6

5)

2042(E

nro

lled f

or

47 y

ears

, A

ged 6

7)

2042(E

nro

lled f

or

49 y

ears

, A

ged 6

9)

Simulation for the Effect of Pensionable Age/Period of Enrollment and Private Pension Plans

9 Source: Compiled based on Data by the Ministry of Health, Labour and Welfare (2015)

Estimated Pension Replacement Rates (%) and Supplemental Measures (Case E)

20

15

20

30

20

42

(E

nro

lled

fo

r 4

0 y

ea

rs, A

ge

d 6

5)

20

42

(E

nro

lled

fo

r 4

5 y

ea

rs, A

ge

d 6

5)

20

42

(E

nro

lled

fo

r 4

7 y

ea

rs, A

ge

d 6

7)

20

42

(E

nro

lled

fo

r 4

9 y

ea

rs, A

ge

d 6

9)

20

42

(P

riva

te P

en

sio

n P

lan

s)

Increment (proportional part) Basic Pension Proportional Part Increment (basic pension) Private Pension Plans

10

Excerpts from the Financial Literacy Survey by the Central Council for Financial Services Information, Bank of Japan (2016)

Aside from Benefit Levels, to What Extent Do People Understand the Public

Pension Program in which They are Enrolled?

The amount of money I can receive

The category of insured person

The necessary period of enrollment for pension eligibility

Pensionable age

The type of my public pension program

(Fig. 25) Understanding of One’s Own Pension <Q 27>

I know I don't know

Longevity and Asset Building/Management

11

1) The impact of extension of longevity (extension of longevity): saving behavior, asset selection, retirement age

2) Income/asset risk (factors of asset depletion/variation): fluctuations in consumer prices/asset prices, review

of the social security system (public pension, healthcare/Long-term care expenses), prolongation of asset

management, burden on asset management ability

3) Risk of deterioration in cognitive function (prolongation of a period of low cognitive function)

80s

Amount of Assets

Extension of Longevity

Factor of Asset Depletion

Period of

Deterioration in

Cognitive Ability

Aged 60 Late 60s

Age

90s

Financial Assets that Grow with Advancing Age and Percentage of Risk Assets

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0

500

1000

1500

2000

2500

~34 35-44 45-54 55-64 65-74 75+

Advancing Age and Total Financial Assets (10,000 yen: left), Percentage of Risk Assets (stocks/bonds, trusts, etc.) (%: right)

リスク性資産の割合合計金融資産 Total Financial Assets Percentage of Risk

Assets

12 Source: Estimates by Komamura’s Laboratory

Aging of “Financial Assets”

4% 4% 3% 3% 3%

10% 8% 7% 7% 6%

15% 16% 16% 14% 13%

24% 21% 23% 26% 26%

26% 25% 21% 20% 22%

22% 25% 29% 30% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014年 2020年 2025年 2030年 2035年

Estimates of the Percentage of Financial Assets Owned by Age Increase in the Percentage of the Elderly in Financial Assets

~34 35-44 45-54 55-64 65-74 75+

13

Data: Estimates by Prof. Komamura based on Household Projection for Japan

by the National Institute of Population and Social Research (national projection) (January 2013)

2014 2020 2025 2030 2035

Issues Associated with Lifelong Asset Building

• 1) Time dispersion --> “Do the elderly reduce the weight of risk assets more?”

• 2) Wealth effect --> “With advancing age, financial assets (inheritance, retirement benefit) increase while the weight of risk assets is increased”

• 3) The issue associated with changes in financial literacy (inverted U-shape) with advancing age

• 4) The issue associated with deterioration in cognitive ability with advancing age --> ”Aging behavioral economics”

• 5) Increased uncertainty over public pension (lifetime, indexation) and the social security system

• 6) Lifecycle changes of risks other than financial assets

• Uncertainty over labor income (wage structure, changes in employment patterns, unemployment risks)

• Uncertainty over home mortgage, educational spending and expenses

• --> Will “target year funds” be accepted by the young generation? Issues associated with lifelong personal assets building (those associated with financial literacy and behavioral economics “Policy for cooperation between public and private pension programs”)

14

Financial Literacy Forms an Inverted U-Shape with Age (Peaks in the 60s, and Higher among Men. Young Men are Over-confident)

-15

-10

-5

0

5

10

18-29 30s 40s 50s 60s 70s

Objective Assessment － Self-Assessment (%)

Male Female

15

0

10

20

30

40

50

60

70

18-29歳 30-39歳 40-49歳 50-59歳 60-69歳 70-79歳

Financial Literacy by Gender and Age

男性女性

Compiled based on the Financial Literacy Survey by the Central Council for Financial Services Information, Bank of Japan (2016)

18-29 30-39 40-49 50-59 60-69 70-79

Male

Female

Financial Literacy by Financial Conditions (Percentage of Questions Answered Correctly by Income Bracket/Financial

Asset Level (%))

0

10

20

30

40

50

60

70

80

Financial Literacy by Financial Asset Level

16

0

10

20

30

40

50

60

70

80

Financial Literacy by Income Bracket

No in

com

e

Less than 2

.5 m

il. y

en

2.5

mil.

~ le

ss than 5

mil.

yen

5 m

il.~

less than 7

.5 m

il. y

en

7.5

mil.

~ le

ss than 1

0 m

il. y

en

10 m

il. ~

le

ss than 1

5 m

il. y

en

1.5

mil.

yen o

r m

ore

Don’t k

now

/Don’t w

ant

to a

nsw

er

To

tal

No a

ssets

Less than 2

.5 m

il. y

en

2.5

mil.

~ le

ss than 5

mil.

yen

5 m

il.~

less than 7

.5 m

il. y

en

7.5

mil.

~ le

ss than 1

0 m

il. y

en

10 m

il. ~

le

ss than 2

0 m

il. y

en

20 m

il. y

en o

r m

ore

Don’t k

now

/Don’t w

ant

to a

nsw

er

To

tal

Compiled based on the Financial Literacy Survey by the Central Council for Financial

Services Information, Bank of Japan (2016)

16

Financial Literacy by Educational Background/Occupation (High Percentage of Questions Answered Correctly among Those with High Educational

Background and Public Servants (％))

0

10

20

30

40

50

60

70

Financial Literacy by Educational Background

17

0

10

20

30

40

50

60

70

Financial Literacy by Occupation

Compiled based on the Financial Literacy Survey by the Central

Council for Financial Services Information, Bank of Japan (2016)

Cognitive Function Deteriorates with Age

18 Source: Midori Takayama (Changes and adaptations in intellectual functions; gerontology core subject 1: Changes and adaptations in mental and physical functions/life with advancing age)

Calculation span

Reading span

Backward digit recall span

Execution Performance of Tasks Related to Cognitive Function

Processing speed

Numeric symbol task

Pattern comparison

Letter comparison

Z score

Working memory

Z score

Cognitive Ability and Asset Management Performance

Kim, E., S. Hanna, S. Chatterjee, and S. Lindamood (2012), “Who among the Elderly Owns Stocks? The

Role of Cognitive Ability and Bequest Motive,” Journal of Family Economic Issues, Vol.33, pp. 338-352．

Cognitive Ability and Percentage of Those

Owning Stock Investments

Source: Total Small Medium Large

(<$10,000) ($10,000~50,000) (>$50,000)

Source:

Fig. 1-10 Cognitive Ability (estimate) and Asset

Management Performance

Low score

High score

Difference between two scores

An

nu

al risk (

ad

justm

en

t p

erf

orm

ance)

Size of portfolio

19

Behavioral Economics and Aging (hypothesis) Consider the Impact of Deterioration in Cognitive Function with Advancing Age on Asset Selection

• 1) Due to the deterioration in cognitive function with advancing age, the elderly make a decision to save their cognitive function more; they thus are more prone to causing a framing effect (decision is influenced by how things are expressed).

• 2) With advancing age it becomes difficult for the elderly to respond to many options and they tend to prefer easy-to-follow information and simple options.

• --> The elderly prefer less options (about half) than young adults.

• 3) The elderly are prone to putting off decision-making and will not regret not having made a choice.

• --> The ownership effect (people don’t want to let go of something they once possessed) becomes stronger.

20

• 4) The elderly tend to remember positive emotional events or information and forget negative information.

• --> Influenced more by positive frames than by negative ones.

• --> Issues associated with decision-making and information sharing (Long-term care and inheritance issues) among family members (between parent and child)

• 5) In terms of the temporal axis, they have a perspective of not looking toward the future but looking back on the past.

• --> Delay in decision-making timing (assets/business succession, asset management or vacant house issues)

• 6) Aging and differences between men and women

21

Behavioral Economics and Aging (hypothesis 2)

0

10

20

30

40

50

60

70

80

90

100

18-29 30s 40s 50s 60s 70s

Behavioral Bias by Age and Gender (%)

損失回避損失回避近視眼的

近視眼的横並び横並び

22

• Loss aversion tendency and horizontally egalitarian behavior are more conspicuous among women in all age brackets.

• Near-sighted behavior is more noticeable among men in nearly all age brackets.

• Whereas loss aversion tendency and horizontally egalitarian behavior slightly decline among both men and women in older age, near-sighted behavior rises (refer to Reference Material 3).

Approach from Behavioral Economics


Horizontally

egalitarian, Male

Loss aversion,

Female

Near-sighted,

Female

Horizontally

egalitarian, Female

Loss aversion,

Male Near-sighted, Male

Implications of Asset Management and the Social Security System in Older Age

• 1) A “decline” in cognitive function in an aging society represents a “rise in transaction costs” and a “decline in market function”

• Modern social and economic activities are designed on the premise of the presence of a certain level of information processing capacity

• 2) How financial services should be in an aging society

• Response to the elderly’s mental and physical changes (psychological fluctuations (instability (including a will)), decline in understanding/memory (financial products and procedures), postponement of decision, decline in transaction capability, etc., and psychological characteristics (at variance with family members in understanding)

• Cooperation between finance and healthcare/Long-term care/welfare

• --> Adult guardianship (issues associated with the use situation, property management and physical custody), regional comprehensive care and citizen guardians

• Issues over inheritance (conflicts of interest between parent and child or among family members, including changes in cognitive function and psychology)

23

Trends in Longevity and Changes in Social and Economic Systems

• 1) From the average life span of 80 years to that of 90 years and to that of 100 years

• 2) In terms of the impact of the progress of longevity, attention needs to be paid not only to a numeric increase in the number of the elderly but to a qualitative impact on social and economic systems as well.

• 3) Establishment of the social and economic system that fits into longevity

• 1) Review of various social and economic systems established in the industrial revolution/welfare state era (the age category of schooling, employment and retirement under the 20th century model)

• 2) Establishment of the social and economic system that incorporates changes in intellectual/cognitive function and psychology with age: Policy formulation based on cognitive science, gerontology and social neuroscience

• Revision toward a lifecycle perspective

• Needs for revising an “autonomous individual persona (decision-making, ability to judge)”

• Needs for putting in place new social economic rules, public roles and services (including the social security system) by leveraging the fruit of aging behavioral economics

24

Reference Material 1: Percentages of Correct Answers by Area in the Financial Literacy 2016

25


Attribute-based characteristics are as described below: 1) The percentage of correct answers is the lowest in the age bracket

from 18 to 29. With advancing age, it tends to rise (slightly falls in those in their 70s).

2) The percentage of correct answers is relatively low among students and part-timers.

3) With advancing annual incomes and financial assets, it tends to rise. 4) The higher frequency of reading financial/economic information, the

higher the percentage of correct answers. 5) Those who have gained experience in financial transactions tend to

show higher percentages of correct answers.

In a comparison of the same true or false questions as those used in Japan, the percentage of correct answers was 10% lower in Japan than in the U.S. The percentage of correct answers was below that of the U.S. in any of the categories, such as by question, gender, age bracket and annual income. In terms of behavioral characteristics compared with the U.S., the number of those who feel they are over-indebted was smaller and that of those who have a contingency reserve was larger in Japan. *In comparison with other countries overseas, you should allow for the fact that circumstances differ in terms of financial products and services, the taxation or educational system when looking at the results.

金融リテラシー・マップの分野正答率

家計管理 51.0

生活設計 50.4

金融知識：金融取引の基本 72.9

金融知識：金融・経済の基礎 48.8

金融知識：保険 52.5

金融知識：ローン・クレジット 53.3

金融知識：資産形成 54.3

外部の知見活用 65.3

合計 55.6

Areas of the Financial Literacy Map Percentage of

Correct Answers

Family finances management 51.0

Life design 50.4

Financial knowledge: The basics of financial transactions 72.9

Financial knowledge: The basics of finance and economy 48.8

Financial knowledge: Insurance 52.5

Financial knowledge: Loans and credits 53.3

Financial knowledge: Asset building 54.3

Use of outside knowledge 65.3

Total 55.6

Reference Material 2: International Comparison of Financial Literacy

26

0

20

40

60

80

100

General (1) Interest (2) Compound interest (3) Risk and return (4) Definition of inflation (5) Dispersion

International Comparison of True or False Questions Answered Correctly

Japan OECD Average Germany United Kingdom Norway United States


Reference Material 3: Approach from Behavioral Economics

27


Regarding an investment with an expected rate of return of 5% (refer to Fig. 61), 80% of respondents said “Won’t invest,” showing a strong tendency toward avoiding loss overall. There were many of those who refrain from investing in stocks, investment trusts or foreign currency deposits among those who show a strong tendency toward loss aversion. This tendency was stronger among women than among men. Near-sighted behavioral bias proved strong among the elderly and men. Horizontally egalitarian behavioral bias proved slightly stronger among young adults and women and the percentage of correct answers among those who had a strong bias for this was low. Among those who had a strong bias for this, many financial troubles occurred and the number of those who feel over-indebted was large.

(Fig. 61) Loss Aversion Tendency <Q6>

When you invest 100 thousand yen, either a

profit on gain in price of 20 thousand yen or a

loss on decline in price of 10 thousand yen

will be generated. What would you do?

Will invest

Won’t invest

(Note) For further details of the three behavioral biases described on this page, refer to the “Importance of Applying Behavioral Economics to Financial Education” (Central Council for Financial Services Information, Bank of Japan).

28


(Table 62) Near-sighted Behavior and Horizontally Egalitarian Behavior <Q1-3 1-10> (%)

Behavioral

Bias Question

1 2 3 4 5

Applicable ← No opinion → Not

applicable

Near-sighted

Behavior

On the precondition that you will invariably receive either (1)

100 thousand yen now or (2) 110 thousand yen in a year, you

will opt for (1).

30.8 16.3 17.8 12.9 22.2

Horizontally

Egalitarian

Behavior

If there are more than one similar products, more often than

not you buy one that is recommended as the best-selling

product rather than the one that you think best.

3.7 11.3 43.4 22.9 18.7

(Table 64) Characteristics of Those who Have a Strong Behavioral Bias <Q1-3, 1-10, 6, etc.> (%)

Percentage

of Correct

Answers

Percentage

of Those who

Have

Invested in

Stock

Percentage of

Those who Have

Experienced

Financial Trouble

Percentage of

Those who Have

Borrowed from

Consumer Loan

Companies

Percentage

of Those

who Feel

Over-

indebted

Total Number of Respondents 55.6 31.6 5.9 3.9 11.4

Those who Have a Strong Loss Aversion Tendency 52.8 24.0 5.3 3.5 10.7

Those who Have a Strong Near-sighted Behavioral Bias 56.7 33.3 7.0 5.8 15.6

Those who Have a Strong Horizontally Egalitarian Behavioral

Bias 48.6 34.6 7.0 4.3 18.2

Reference Material 4: Examples of Financial Literacy Questions

29


Q21 Answer if the following sentence is correct (one each) [Compulsory Input]

1 2 3

Correct Wrong Don’t Know

1. In the high inflation phase, the prices of daily necessities and services rise rapidly 60.8 7.6 31.6

2. If you take out a home mortgage, when comparing the payment period of 15 years with

that of 30 years, the amount of monthly payment will be normally larger but the total amount

of interest to be paid will be smaller for 15 years.

68.4 5.8 25.8

3. Investment whose return is higher than the average entails a higher risk than the average. 74.8 2.7 22.5

4. Buying a stock in a company is a safer investment than buying a stock investment trust (*)

*A financial product that invests in stocks in several companies 5.2 45.8 49.0

Materials/Reference Literature

• Ministry of Health, Labour and Welfare (2015) Report on the Results of the FY2014 Financial Verification – The Actual Financial Situation and Outlook for the National Pension and Employees’ Pension Programs

• The Financial Report on the Public Pension System for FY 2015 by the Pension Actuarial Subcommittee, Ministry of Health, Labour and Welfare (2017)

• The Financial Literacy Survey by the Central Council for Financial Services Information, Bank of Japan (2016)

30

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