Intergenerational issues in Japan

 

David Kingman describes the fallout from a swelling elderly population
Japan is the world’s fastest ageing country, making it a good case-study for the type of intergenerational issues that could emerge in Britain as our own population gets older.

The increase in longevity in Japan has been remarkable: life expectancy for Japanese males in 1947 was about 50 years, but by 1965 it had already risen to 68 years. It is now around 80 (and for women is nearer 87).

This has been accompanied by a dramatic fall in the birth rate, so that the average woman now has just 1.4 children; remarkably, while people talk of China ageing because of its government-enforced one-child policy, since the 1980s Japan’s people have voluntarily adopted what amounts to one of their own.

The low birth rate means that a growing share of the population lives in retirement, creating an adverse old-age dependency ratio. Japan now has only 2.6 workers for every pensioner,– even lower than the OECD average of 4.

The Japanese system puts a remarkably heavy burden on young workers, as the increase in tertiary education has meant that the average age at which people become economically productive (enter the labour force) has risen to 26.

This leaves fewer working-age people supporting a much larger retired population as well as supporting children and students for longer, to the extent that the “productive life” of a Japanese citizen is now on average only 33 years.

Generational consequences of the baby boom

Like Britain, Japan had a large post-war baby boom, but the numbers are of course bigger as Japan’s population is bigger – currently about 127 million, over twice that of the UK.

 

Japan’s boom was even sharper than Britain’s and in the peak years births were running at 2.7 million per year whereas now they are down to 1.1 million. Japan was actually home to fewer children in 2010 than at any time since 1908.

The high number of births led to a “demographic dividend” in Japan once these babies had grown up, in which people of working age were the largest section of the population, meaning they had only had smaller cohorts of pensioners and children to support. Growth rates in the late 1960s and 1970s were as high as 11% – helped, of course, by wide open export markets and a highly motivated population.

In the coming decades, the shrinking of Japan’s working-age population will increase the burden they face in supporting the elderly. While the number of workers grew spectacularly in the 20th century, adding a million every year between 1950 and 1975, it reached its peak in 1995 and has been declining ever since.

By 2030, the predicted workforce will have lost 20 million people compared to its peak, and on current trends the working-age population will actually be smaller in 2050 than it was in 1950, reflecting the contraction of Japan’s population as a whole.

Even this doesn’t tell the whole story, as Japan still has low rates of female participation in the labour force by developed-country standards, meaning half these potential workers are unlikely to participate in the workforce to the fullest-possible extent. A tradition of hostility towards immigration also means that very few foreigners come to work in Japan, removing a valuable source of labour that virtually all other OECD members take advantage of.

Since 1991, Japan has had to derive virtually all its economic growth from improvements in efficiency, as when fewer people are working, you have to make them more efficient in order to achieve the same level of output.

However, gains in this area can only go so far before financial and technological ceilings are reached, putting into serious question the likelihood of the present younger generation enjoying a level of prosperity comparable to that of their parents and grandparents.

Labour market flaws

 

There are several features of the Japanese labour market which actively entrench intergenerational unfairness.

The Japanese economy is dominated by major corporations, particularly in the technology sector, whose employment practices have given rise to the famous Japanese ‘salaryman’: a national stereotype of a white-collar worker taken on straight out of university by a major corporation with which he spends his entire career.

The corporation you work for is extremely important socially – most people derive their social standing and sense of self-worth from working for a prominent company, and it’s even not uncommon to hear people introduce themselves by putting the name of their employer before their first name.

Most Japanese companies base pay increases entirely on seniority, so the concept of the ‘high flyer’ is virtually unknown: most younger workers, regardless of ability, have to be employed by a company for decades before they can get anywhere near the top table.

This system is having particularly acute impacts at the moment, as there are so many elderly employees at the large companies that it is very expensive for them to keep on the payroll. This creates an incentive for the employers to lobby for and enforce low retirement ages so they can reduce their salary overheads.

It partly explains why the Japanese have stuck to a mandatory retirement age of 60; however, retirements are also very expensive for companies, as they are usually accompanied by a large payout – 44 months of final salary is typical if the retiree has worked for 35 years.

The children of the baby-boomer generation are now mostly in their 40s, meaning Japanese companies also have a bulge around the mid-level of people in this age group. The combined cost of paying for all these older employees leaves few resources for taking on younger people at the bottom of the ladder.

Now the graduates who can find employment are increasingly only being offered short-term, ‘irregular’ contracts, which pay less than the those for people on the company ladder even if they involve doing exactly the same job.

A third of the entire workforce, disproportionately including those in the younger age groups, was employed in this way in 2010, creating segregation between corporate ‘insiders’ and ‘outsiders’ that reinforces intergenerational inequality.

Occupational pensions are downwardly flexible

The Japanese are currently scrambling to find ways of dealing with their low dependency ratio; for example, in 2004 they reformed their pension system. Whilst it is still largely a pay-as-you go system, meaning that pensions are unfunded and depend on future contributions to make payments to pensioners, in order to make it sustainable the contributions are fixed and if it becomes necessary the benefits can be revised downwards.

This is a feature which is lacking in the UK so that intergenerational tensions over pensions seem more likely to increase in the UK than in Japan.

They have also found ways of enabling older people to continue working after their retirement – the number of over 60s who go back to work of some sort is very high by international standards. Over 30% of the over 65s work after retirement which compares with less than 10% in Europe, and about 20% in the US.

Despite these measures, the size of the intergenerational imbalance within the population is such that, overall, much of the cost of paying for this huge cohort of elderly people will have to be borne by the younger generation.

A society of the aged

Perhaps the most striking characteristic of all about Japanese society in intergenerational terms is the way everything is being gradually remolded by an elderly population to suit their needs and spending power.

Already many companies that sell products aimed at young people are in trouble. Retailers and department stores have had to merge to avoid going under, while in 2009 there was talk of a merger between Japan’s two largest producers of alcoholic drinks, Kirin and Suntory, both of which have had their markets eroded by the fact that older people tend to drink less alcohol.

General Electric’s business in Japan hasn’t seen any growth for over five years, which the chairman, Yoshiaki Fujimori, has said publically is because older people use less electricity through going to bed earlier

Travel companies are in trouble because the elderly don’t make business trips, while commentators have even argued that Japan’s great reputation for technological innovation is faltering because it was forged while the population was extremely youthful. Older people in Japan, research has suggested, are less keen to adapt to new technology, stalling development even in vital fields like healthcare.

This separation between the interests of the young and the elderly may partly be a product of their changing living arrangements. Japan is famous for its respect for the family and for having their old people living in extended families. But this is shifting: in 1981 42% of the over 65s lived in a multigenerational household (one with three generations or more) but this has dropped by half over the last 30 years so is now only 20%.

This shift is due, it seems, to a combination of several factors: increasing wealth, more urban living and changing attitudes. Another important reason may be that, because many of the baby boomer’s children didn’t have children themselves, following a collapse in the birth rate during the 1980s, there may be many under-counted two-generation households in which elderly baby boomers live with their middle-aged, childless offspring.

How Japan safeguards the interests of its young alongside those of its elderly will be an issue of extreme importance in the coming years, as it seems that, under the present situation, the interests of one group are much better represented than those of the other.

 

 

Posted on: 25 June, 2011