6/12(화)-Implications of the Baby Boomers' Retirement in Japan

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Implications of the Baby Boomers' Retirement in Japan

1. The Dankai Generation's Retirement

Beginning this year, members of Japan's first and biggest postwar baby boom, the dankai (big cluster) generation born in 1947-49 will begin to retire. Their disappearance from the workforce will herald both positive and negative effects on Japan's economic future. Likewise, Korea will soon face the retirement of its own baby boomers, who were born after the 1950-53 Korean War. The Japan experience may provide ideas on how Korea could grapple with its own looming loss of experience and expertise as it also addresses the lowest birthrate among OECD nations.

Compulsory retirement in Japan is set at age 60. Although policymakers are rethinking the age limit on employment, nothing is in place yet to plug the impending wave of retirements. As of 2006, the dankai generation totaled 6.83 million people, or 5.3% of Japan's total population. Also, the total number of active workers between the ages of 55-59, which included the dankai generation, was 7.9 million.

2. Impact

The dankai generation's retirement will drain the Japanese labor market of exceptional talent and expertise. Assuming that the dankai generation retires at the same speed as Japan's wartime generation, the labor force could possibly shrink by 1.8 million over the next four years. Japanese estimates put the loss in productivity and other economic factors at roughly 16 trillion yen by 2010.

Moreover, the dependent elderly population ratio will begin to rapidly increase within the next 10 years, increasing the government's fiscal burden. By 2015, the ratio of elderly (aged 65 or over) in Japan's total working population is expected to reach 25.4%, from 20.2% in 2005. This substantial increase over a relatively short time period raises concerns over the ability of government and corporations to pay pensions.

The government will have to depend on a shrinking number of workers to support a burgeoning number of retirees. In 2005, 3.3 people in the Japanese workforce supported each retiree. According to the Ministry of Health, Labor and Welfare, this ratio is forecast to tighten to 2.4 working-age people by 2015. In order to make up for this shrinking gap, workers' fiscal burden will increase as the dankai generation starts to receive pension payments. Japan's problems may be particularly acute as it maintains a pay-as-you-go pension scheme. That is, salary deductions from current workers pay the retirement benefits of current retirees. The system obviously places a mounting burden on a shrinking workforce. It also hampers the government's ability to put aside money for the current workforce's own retirement benefits.

With nothing to lose, the situation could exacerbate attitudes toward employment. Japan already is concerned with the number of "freeters" in its young adult population. Freeter, a term coined by the Japanese in early 1990s, combines the English word "free" and the German word arbeiter. It describes young people who do not commit to one line of work and change jobs frequently. They may have lengthy periods of employment since they judge job opportunities on emotional appeal.

At the corporate level, companies will have to pay more and more lump-sum retirement grants as dankai employees depart. Over the short-term, the cash payments will be burdensome. Over the long term, corporate debt-to-equity ratios will rise. Indeed, total issued corporate debt related to retirement payments currently stands at 92 trillion yen (in terms of 1,421 listed companies in the Japan Stock Exchange), whereas companies have set aside only 70 trillion yen in reserves over the long-term.

Aside from the financial burden, of course, is the loss of vital generation's work experience and skills. The technical workers of the dankai generation have played a key role in enhancing Japanese firms' competitiveness. Having joined the workforce in the 1970s, the dankai generation catalyzed Japan's rapid economic growth, helping raise product quality and productivity. The retirement of this generation thus raises concerns about the succession of skills to the next generation of workers. Companies may also lose their competitive edge in production.

It would be wrong to assume the retirement of the dankai will have only negative repercussions. While the economy will miss their labor inputs, it stands to get a significant boost in consumer spending.

According to Japanese government statistics, the dankai generation has a higher consumption rate of disposable income than current retirees. As products of the go-go 1970s and 1980s in Japan, when spending was carefree, dankai consumers cultivated diversified tastes, not only spending on necessities such as health care, but also on services such as travel and other forms of recreation. Having formed a new trend in the Japanese society, they will likely to differentiate themselves from the existing senior citizens in consumption after retirement. Furthermore, the propensity to consume will create new business opportunities such as travel, leisure, real estate and health businesses targeting the generation.

In an indication of the potential spending impact, the Dentsu Consumer Research Center, a Japanese market research firm, estimates that the dankai generation's spending after retirement will boost Japan's consumption by around 7.7 trillion yen. When the multiplier effect is applied, that translates into 15.3 trillion yen for the GDP. MyKomon, a Japanese accounting firm, projects a 0.1% rise in consumption and 0.1% in GDP in 2007.

Sizeable retirement packages and monthly pension checks, of course, will put plenty of cash in seniors' wallets. Cumulative payments to retirees of the dankai generation are expected to reach 50-80 trillion yen in 2007-2009 alone.

The baby boomers' spending will also be boosted by measures to lengthen the employment age and rehiring plans. For example, Japan's government revised its law on employing the elderly. C ompanies may re-employ retirees, extend retirement ages, or get rid of retirement ages altogether. In a survey by Nomura Research Institute on November 2004, dankai generation respondents said they would be willing to accept jobs after retirement. Among the respondents, 73.4% said they hope to continue working after retirement; among them, 44% said that they want to work irrespective of the type of jobs, while 54% said they do not have specific preferences on the place of work.

3. Implications

Japan's situation lends itself to understanding Korea's own postwar baby boomers - those born between 1955-1963 and now approaching retirement age. The Korean government needs to come up with plans to effectively utilize this population after retirement by offering them opportunities for re-entry into the job market. What is import!!ant here is to create an environment that enables active participation of these people, rather than only focusing on introducing laws and systems to extend retirement age. Simple lengthening retirement age could burden companies that want to hire new employees or hope to operate with a leaner workforce, which may cause social problems.

1. What do you think is the ideal retirement age? Why did you choose that age?

2. What are the advantages and disadvantages of lowering the retirement age?

3. Would you retire early if you have already made a lot of money?

4. Would you object if you were forced to early retirement by your company?

5. Do you have any plan after retirement?