Japan Looking to Future With a 401(k)-Like Retirement Plan

By MARK MAGNIER

Aug. 12, 2001 12 AM PT

TIMES STAFF WRITER

TOKYO —

Masao Shimizu, 53, dreamed of retirement, confident his nest egg would allow him to travel overseas to watch Formula One racing in Monte Carlo, see the Grand Canyon and take in Niagara Falls. That dream recently turned into a nightmare, however, when the auto parts company he worked for squeezed him out with barely a week’s notice and a modest severance payment.

“Most experts say you need around $2,400 a month to retire comfortably, but I’m looking at maybe $800 from the government after I turn 60,” he said. “That’s nothing. It’s just unbelievable to think about ending your working years that way.”

Growing old alone and in need is a common fear even here, where a network of family and corporate relationships has provided more of a protective cushion than in many countries. Increasingly, however, the Japanese worry they won’t have the soft landing they expect, given their rapidly aging population, a government wallowing in debt and a culture that balks at taking the risks necessary to make money grow.

In a first step aimed at tackling this complex social, economic and political problem, Japan on Oct. 1 will introduce a pension system modeled on the popular U.S. 401(k) program. The hope is that this and other changes eventually will make people feel secure enough about their future to breathe some life into the world’s second-largest, albeit moribund, economy.

Wary investors and hard times aren’t the only impediments as Japan struggles to change how people view and manage their sunset stash. Even though the new approach by law must include at least one investment option that guarantees principal, it may not be enough to ease worries in a paternalistic society in which risk is a four-letter word. Most Japanese are used to the security of someone else handling things and are reluctant to assume more responsibility for their financial future.

“I’m just not comfortable with the idea,” said Naoki Murayama, a 43-year-old Tokyo sales manager with telecom giant NTT Corp., who saves 25% of his salary and plans to retire in the country where it is easier to make ends meet. “It seems like a lot of trouble.”

This reluctance contrasts sharply with America’s acceptance in the last decade of 401(k) plans, which have been an enormous engine for U.S. markets and companies in search of capital.

Even individualistic Americans took years to grow comfortable with these savings programs, and they were helped by generous tax breaks, corporate matching funds and a booming market that, despite recent reverses, made investing in stocks and mutual funds popular and profitable.

The Japanese consumer is roundly berated for buying too little, saving too much and shunning investments. Japanese households have 8.9% of their financial assets in shares and mutual funds, compared with 46.9% for U.S. households.

That said, the Japanese market isn’t serving as the kind of balm that soothed American fears. Japan is introducing self-directed pensions at a time shares are coming off a 16-year low, consumer confidence is underwater and the American party is effectively over.

Brokerage houses, insurers and even the post office--eager to manage even a sliver of Japan’s $400-billion pension market--say there’s no opportunity like the present. “This is a good time to invest,” said Shoji Yamada, chairman of the Mizuho Pension Research Institute, affiliated with Mizuho Trust Bank. “You’re buying at the bottom. Americans who bought after the crash in the 1920s earned a lot of money.”

Even within the financial industry, however, these arguments aren’t widely embraced. Yamada acknowledged that his own portfolio mirrors those of most Japanese, with almost all his money socked away in savings accounts earning substantially less than 1%. “Most Japanese still see the stock market as a kind of casino,” he said.

Financiers have found themselves disappointed before, after salivating over large fees they expected to earn as Japanese moved to higher-risk investments.

Driving the introduction of the plan are some pretty nasty facts of life. Japan’s social security system and many of its companies are going broke, corporate pension funds are massively underfunded and universal health care is in trouble. Add it up, and the future for young and old alike is about paying more and getting less.

Many of the traditional social structures that saw three generations watch out for each other under a single roof also are quickly breaking down, spurred by big-city living and Western-inspired popular culture. Masato Suzuki, 58, recently laid off from a building maintenance company, said children used to take care of their parents in return for an inheritance. Now both generations think more about themselves.

“The connections between people are getting weaker,” he said.

Demographic forces also drove the U.S. to create self-directed retirement accounts, but Washington, arguably, crafted more of a win-win solution. Japan’s plan is far less attractive for the working stiff, and labor unions already are crying foul.

Individuals with traditional company pensions will be allowed to contribute only $1,737 a year to the savings plan, compared with more than $10,000 for Americans. Employees will not be able to contribute their own money tax-free, which rules out company matching. Management fees are expected to slice off 1% a year, and a government tax probably will take an additional 1.2% even as investment returns here approach zero.

“The system is ridiculous,” said Shigeru Ojima, assistant director of the 8-million-member Japanese Trade Union Confederation. “Companies are the only winners.”

Still, any change would face criticism, given the scale of Japan’s pension problems and their effect on the broader economy. Although most agree this plan is a modest start, analysts say it begins to move Japan in a different direction.

“It starts changing the economic structure,” said Garry Evans, strategist with HSBC Securities. “If workers know their long-term interests are tied to the stock market, they start worrying more about their company’s profits rather than simply trying to take as much as you can out in wages and pension.”

As their obligations balloon--last year’s yield on pension fund investments was a negative 9.8%--companies are desperate to shift more of the risk to employees.

In a nation famous for sweeping bad debts under the tatami mat, corporations until recently weren’t required to disclose pension shortfalls. New accounting rules this year, however, are shining a beam of light into some dark financial basements while extending managers a 15-year grace period to make up the deficits.

In just a hint of the size of the problem, Toyota Motor Corp. revealed an $8.2-billion shortfall when it listed on the New York Stock Exchange in late 1999, and Matsushita Electric Industrial Co., Fujitsu Ltd. and Hitachi Ltd. this year wrote off a combined $500 million.

The picture is similarly bleak on the government side. In the fiscal year ended March 31, investment losses in the social security system totaled $13.6 billion, the 11th loss in 12 years. At present, four young people support every retiree, compared with nearly five in the U.S. Without an overhaul, demographics dictate that 2.5 youngsters would support each senior citizen by 2025 and 1.5 by 2050, compared with about three by 2030 in the U.S.

“I’m paying over 20% of my salary, which is way too much, in premiums and insurance now,” said Tadatsugu Saito, a 30-year-old graphic designer. “I know we’re supposed to help the elderly, but just helping my own parents is already a huge burden.”

Other potential solutions include raising the retirement age in stages from 60 to 65, cutting payments by 5%, cutting off the more affluent elderly, freezing cost-of-living adjustments and reducing benefits until age 70.

As Japan gives birth to its version of the 401(k), most analysts expect a gradual evolution as companies keep guaranteed payout systems in place for current employees and phase in the 401(k) approach for new hires. Haruka Urata, manager with Nippon Life Insurance Co., believes it could be five to 10 years before the new system gains much traction.

Behind all the complicated rules, battles over tax breaks and attempts to change the culture is a wellspring of anxiety and disenchantment among millions of Japanese brought up to believe in a system that would take care of them from cradle to grave.

Laid-off manager and Formula One fan Shimizu said that although men his age are increasingly being forced out of jobs to cut costs, the news that his future was up in the air hit him hard. “I thought I was going crazy,” he said. “I started talking to myself. I just couldn’t believe it was happening to me.” The company declined to comment on Shimizu, other than to say the issue was settled.

As shock turned to anger, however, Shimizu said, he contacted the Tokyo Manager’s Union, organized to help people who are laid off, and eventually forced the company to provide him with a relatively modest one-time retirement payment. “I couldn’t trust that they’d pay a pension over many years,” he said. “So I just took it.”

Getting another job is proving difficult in a nation where age discrimination is legal and the economy is awash in unemployed middle-aged white-collar workers, he said. Most of the settlement money he received went toward the mortgage on his house, which is worth 40% less than what he paid a decade ago. He has almost no savings left and a 15-year-old to put through school.

He now spends most of his days at the Manager’s Union in the community of others in similar straits.

“I’m really worried about the future,” he said. “It’s time we realized we can’t just follow what the government tells us. We really have to be a lot more skeptical.”

Rie Sasaki in the Tokyo bureau contributed to this report.

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Investment Habits

Financial assets held by households (end of March 2001):

Japan

(Total $11.1 trillion)

Currency and deposits: 54.5%

Insurance and pension reserves: 28.1%

Stocks: 6.5%

Other: 4.4%

Bonds: 4.1%

Mutual funds: 2.4%