Hello all! I hope everything is going as great as it has always been. Today I will be talking about Japan. Specifically, it’s use of behavioral economic strategies in reforming its retirement pensions to deal with the problem of too many old people (I know that sounds bad but in an economic sense) and its result on a diminishing work force.
Earlier this year, Japan came out with some interesting statistics. Nearly 30% of its citizens were aged 65 or older, leaving the country with a pension system that faced significant financial challenges. In tandem with an increase in retirees and a decrease in the number of younger people paying into the system, the years leading up to 2024 saw Japan quietly make several reforms to the incomplete pension system.
With this in mind, the Ministry of Health, Labor, and Welfare (MHLW) as well as the party officials who’d drafted the legislation, weren’t planning for the short cycle in the public policy-oriented news coverage that typically followed such housekeeping actions. Ross Melnick, a former public affairs officer who’d served in the Diet, told me that none of the pension reforms were great, which for once was a good thing.
So how is Japan attempting to mediate the problem, you may ask. Well, Japan has relied on some interesting BE principals to get the job done. Namely, that of Nudge theory and salience. From my experience, both of these principals are usually employed with the idea that people would rather make a choice that is easier or more obvious to them, and that has seemed to be the case for the vast majority of policies enacted. With this in mind, lets get into how the MHLW applied these principals in action.
The reforms introduced automatic enrollment in additional retirement savings plans, with an opt-out choice for those who would rather take care of their financial situation themselves. This was a move to counteract procrastination and to ensure that a much larger segment of the working population made serious moves toward saving for their own retirement. This use of the default option was a perfect example of behavioral economics at work: in the subtle coaxing of the average person’s financial decisions toward something that economists understand to be in that person’s best long-term interest, which is what the whole idea of the paternalistic welfare state is about.
The way automatic enrollment in retirement savings plans was structured in Japan ensured that a greater number of working citizens were set up to be financially secure once they stopped working. Because of automatic enrollment, working Japanese now have a total of 187,000 accounts in defined-contribution retirement savings plans, with a far greater potential to ensure their financial security in retirement, the Financial Services Agency and NISA stated in a 2016 white paper. Part of the framing has been presenting choices to the financial decision-makers in a household in terms of immediate versus future rewards. This choice architecture has been applied not just to the reformed DC pension plans, but also to the reformed public pension plans.
The pension reform that Japan undertakes in 2024 is apt to become a model for other societies that are getting old at about the same pace and in much the same way. The more articles I write the more I see the reasoning behind using salience and environmental cues to promote healthier decision making. Hopefully, the US can follow suit in these ways of addressing long-standing problems.
cognitivecents.com 
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