Retirement and Japan

In our last posting, I argued that many mentally and physically healthy older persons in developed nations retire earlier than is socially efficient. Since retirement benefits are not sensitive to the accumulated social security taxes that a person pays on his or her earnings, workers who become eligible to retire often find the improvement in retirement benefits from working longer too small to provide enough incentive to continue working.

We come back to the retirement issue this week because I discovered during a just concluded trip to Japan that this country has taken the lead in encouraging much later effective retirement than other developed nations. The system in Japan is a bit complicated, but has several important features that could be implemented in the United States and other nations. The Japanese approach also has implications for many comments on our discussion last week- I respond to these separately.

The official retirement age at medium and large Japanese companies is 60 for both men and women, and it is quite rigidly enforced, even for top executives. This retirement age is close to the lowest among rich countries, with official retirement in the United States being about five years later at age 65, and the average among 30 OECD member nations being about 64. As Posner and I discussed in the previous entry, the American Age Discrimination in Employment Act of the early 1990's even prohibits mandatory retirement for professors and a few other occupations.

Most Japanese do not stop working at age 60. The OECD reports that Japanese men generally continue to work until almost age 70, and the average retirement age of women is only a few years younger. These retirement ages of both men and women are the highest among all OECD nations that include not only the United States, but also the nations of Western Europe.

I was initially puzzled by these OECD data for Japan since they suggested much later retirement ages than I presumed from my erroneous belief that actual retirement ages were close to the official ones. But Japanese specialists on older workers indicated to me that their numbers are similar to those of the OECD. According to these Japanese sources, about half of all men aged 65-70 are working, and so too are about one quarter of men between 70-75. Hence they too estimate an average retirement age of near age 69.

Even when they stay at the same company after age 60, which is fairly common, workers and executives are placed at lower level jobs with significantly reduced pay. Others go to smaller companies with lower pay, although perhaps in comparable positions that they had in the larger companies that had employed them for many years. In all cases they work at their new jobs for a fixed term, usually five years. Upon finishing that term at age 65,they tend to move on to other jobs, also with a fixed term, and frequently with a further reduction in their earnings.

What spurs the Japanese to work beyond the official retirement age is partly that they usually are in good health, and do not look forward to about 30 years of retirement without much to do. However, they also continue to work because retirement benefits from the government and private companies are modest, even for higher-level executives. Retirement income of about $2000 per month is at the high end, so most workers who retire at 60 receive much less than that. They decide to work in their 60's and their 70's in order to supplement greatly their incomes.

In this way the Japanese system enables men and women to keep working to relatively late ages while at the same time providing flexible earnings and activities of older workers. In effect, this system recognizes that while older workers generally remain productive in the modern era of good health, they may not continue to merit the earnings reached after many years of employment. Some economists have attributed mandatory retirement to the need to move older workers out of the labor force because they are paid more than their contribution to production. Whether or not this interpretation of mandatory retirement is correct, the Japanese system does provide flexibility in both the earnings and occupations of older workers while still mandating official retirement at the early age of 60.

The Japanese system where employees past age 60 sometimes work for lower pay at the same company that had employed them would not be possible in the United States and some other countries because of legislation that prohibits alleged discrimination against older workers. The combination of legislation that prevents companies from lowering the earnings of older employees, and of legislation that prevents mandatory retirement in some occupations, creates a major rigidity in the market for older workers.

In several crucial respects the retirement system of many European countries is the opposite to that of Japan. For example, the official retirement age of men in Belgium, German, and the United Kingdom is 65, five years higher than in Japan. Yet, actual retirement ages are considerable lower in these countries than in Japan. For example, the typical age of retirement is 59 and 61 in Belgium and Germany, respectively. Effective retirement ages are also below age 60 in Italy, France, and several other Western European countries. In these countries inflexible labor markets make it difficult for older persons to find work, and generous benefits encourage retirement at even earlier ages than the official age.

Early ages of actual retirement and generous retirement benefits contribute to the very serious problems faced by the social security systems of most West European nations, and to a lesser extent of the United States. By extending their actual retirement ages to the Japanese levels, these nations would go some ways toward solving their problem of financing old age benefits.

The Japanese intrinsically face a tougher retirement problem than most other member nations of the OECD since they have one of the lowest birth rates in the world, the oldest life expectancy, and virtually no immigration. As a result, about 40 per cent of the Japanese population is expected to be aged 65 or older by the year 2050, the largest fraction of elderly among OECD countries. The continued employment of most of their men, and to some extent their women, well beyond the official retirement age of 60 has helped to meet, although it has not solved, Japan's challenge of a rapidly aging population. Still, however, their flexible approach to the employment of older persons provides an excellent example to be emulated by other nations faced with a rapidly growing elderly population.

I will try to respond to a few of the many good comments on my discussion last week of retirement. One person asked if I believe I am capable of doing work of the same quality that I had done in the past. My answer is no--age brings valuable experience, but at some point one loses some capacity for originality.

Some of you believe that early retirement is necessary to provide full employment. Yet labor markets can employ the vast majority of people who want to work if conditions of employment are flexible. Japan has low unemployment rates with high levels of employment among the elderly (see my posting this week) because it allows flexible earnings of older workers. Other nations could employ many more of their older workers if they allowed compensation to be market determined.

What is the so-called "natural" rate of unemployment is somewhat controversial. A couple of decades ago, it was believed to have risen in the United States to 6 per cent or more. But experience of the past 20 years suggests that the United States can achieve full employment with 5 per cent, or perhaps even lower, unemployment.

I agree that flexibility is necessary in dealing with older (and other) workers since the deterioration in their health and other measures of productivity varies greatly. That is why I believe conditions of employment of older workers should not be determined by legislation--which tends toward rigid rules--but by market forces.

I am no fan of age discrimination legislation, such as the ADEA in the United States. After all, older workers are among the best paid of all workers and have among the lowest rate of unemployment. African Americans by contrast have relatively low pay and high unemployment rates. So the argument for anti-discrimination legislation in their case has essentially no applicability to older workers.

As one of the commentators responded, pensions generally now vest when an employee is discharges, so there is no saving in pension costs by firing older workers. Health costs may be another matter, but that is a further reason to separate medical insurance, and its tax benefits, from employment.

I have always believed that economists have to consider nonmaterial aspects of life like character, love, and the like. Economics can deal in a useful way with these traits.

Some of you claim that capitalism and capitalists are the source of inequality and hard-hearted treatment of older workers. I do not believe that is correct. Inequalities, for example, under Mao and Stalin were enormous, including those in the economic sphere. And employee-owned companies, such as United or Avis, have usually fared very badly because of incompetent management.

I would like to respond briefly to a few comments on my posting on retirement in Japan. I never argued Japan has an ideal system in labor markets or elsewhere in the economy. In fact, I have been critical of many aspects of the Japanese economy. But they do seem to have made a better adjustment than Western nations to the trend toward increased life expectancy with better health at older ages.

Americans do not seem to value leisure more than the Japanese. In fact, American men and women now work longer hours per year at most ages prior to 65 than Japanese men and women do. I believe many more Americans would also want to work past age 65 mainly if the social security system and other retirement systems were more flexible, and perhaps also if the labor market handled older workers a little better.

No one would be required to work past age 65. But with a growing recognition that the present social security system is not likely to pay future retirees sufficient benefits, many more workers are likely to want to continue beyond 65.

Japanese fertility is low in rural as well as urban areas. Since the rural population is a very small fraction of the total, Japanese fertility is dominated by urban fertility.

Later retirement does not automatically solve the medical care problems for older persons. But it would be reasonable to combine later retirement with later ages of qualifying for medicare. That would help the medicare system a lot.