Translation of an opinion article originally published in Ma-Do magazine vol. 52, November 2018.
Shigeki Morinogu, Professor at Chuo University Law School and Research Director of the Tokyo Foundation of Policy Research, advocates a Japanese version IRA (indivisual retirement account) as the most desirable system for "asset building for retirement" and awaits the Japanese Government Tax Commition to move towards realizing it.
Proposal for “Japanese IRA” for asset building in the era of 100-year life
Chuo University Law School
This October, the Japanese Government Tax Commission began deliberations on "asset building for retirement" and will set up a special committee to study and review related systems. This is a concrete step toward realizing a Japanese version IRA (individual retirement account), which I have advocated for some time.
The Commission's action fits the 100-Year Life initiative touted by the Abe administration as a pillar of Abenomics. According to Linda Gratton, professor of management practice at London Business School and co-author of The 100-Year Life (published as LifeShift in Japan), Japan is the world's most aged nation, where 50% of people born in 2007 are expected to reach 107 years old. Assuming one works until age 65 and lives to 100, you will enjoy 35 years of retired life. To live those 35 years in comfort and good health, you'll need a decent-sized nest egg.
How well do our current retirement systems serve that goal?Let's review. The replacement rate of income from annuity, an amount of public pension benefit versus the average spendable income of the working generation, currently at 65%, is expected to decline further. By 2050, it will be 50%, according to an optimistic estimate by the Ministry of Health, Labor and Welfare.
Private pension systems, which make up the shortfall in the public system, are rudimentary in Japan compared with other developed nations in terms of penetration and maturity. Not surprisingly, the ratio of private pension benefits in the typical Japanese senior citizen's retirement portfolio is low. The complexity of Japan's public pension systems adds another impediment to retirement saving. Individual corporations offer both defined benefit and defined contribution plans, while certain industries offer their own distinct plans. Having so many plans complicates the system such that most Japanese people simply can't understand it. We must re-examine and improve the current systems to suit a 100-year life, with tax-free saving and investment systems and lump sum retirement grants.
The Japanese government now offers two types of tax incentives for asset building, tax-deferral and tax-exemption: TEE (tax on contribution, tax exempt on management, and tax exempt on benefit) and EET (tax exempt on contribution, tax exempt on management, and tax on benefit). Private pension systems such as defined benefit plans, corporate defined contribution plans, and individual defined contribution plans (iDeCo), are classified EET, and non-taxable saving and investment plans such as NISA (Nippon Individual Savings Account) are TEE. In the US and Canada, tax incentives for individual pension plans such as IRA are structured EET, while Roth IRAs are TEE. People can choose either one or both, according to their needs.
As long as applicable tax rates are equal, the financial values of EET and TEE are the same. The large majority of private pension systems in Japan today are EET; however, we should begin to promote TEE types more, since the tax on contribution is easier for everyone, especially the elderly, to understand. Some in Japan have begun to call for making NISA, a TEE-type, a permanent system. More important, I think, is the need to build a framework for individual asset-building in the 100-year life era. We must encourage development of a Japanese IRA within private pension systems by reorganizing both EET-types and TEE- types, including NISA.
A Japanese IRA would offer many benefits. By allowing plan transitions between EET and TEE, people could adapt their retirement saving habits to their needs and changes in lifestyle. That freedom creates the need for differentiated financial products, bringing new business opportunities to financial companies. Moreover, a Japanese IRA could be used to replace those plans, public and private, that now dissolve under Japan's crushingly complex and fragmented system.
Given the advantages, I'm awaiting the Tax Commission's next move toward establishing a viable Japanese IRA.