Pressured by the demographic time bombs facing them, many countries are engaging in pension reform. The objective, in many cases, is to take the burden off unfunded social security systems. In other cases, it is to help companies reduce the financial burdens of underfunded pension plans.
In Japan, the aim is to use defined contribution plans to help companies reduce their unfunded pension plan burdens. If companies can freeze their underfunded defined benefit plans and replace them with 401(k)-style defined contribution plans, the cost will be more certain, and probably lower. A second aim is to encourage more self-reliance.
The U.S. should observe carefully the changes in the Japanese retirement system.
First, if they are successful in reducing the pension burden on Japanese corporations, those corporations will become even more formidable competitors.
Second, and perhaps even more important, U.S. policy-makers might learn from the Japanese experience. The proposed legislation will allow those who work for companies that do not establish defined contribution plans -- the self-employed and even housewives -- to establish plans for themselves.
There will be no tax on contributions or investment returns, and benefits at retirement will be taxed at rates lower than standard income tax rates.
Clearly the government is doing all it can to encourage the Japanese people to do more to provide for their own retirements.
Not a bad idea for the U.S.