I’ve been reading some recent threads about the Japanese pension system, and I’ve been asking myself this question for the longest time. I’d really like to know if anyone here has knowledge on this.
Basically, when I see discussions about the Japanese pension system, I don’t really see much of its appeal. I’m not sure if that’s because I’ve been comparing it with the Australian superannuation system. There was a discussion about how pension systems in some countries are just too good, not that the Japanese pension is necessarily bad, so I’m wondering if this might also be the case for Australia.
I’m quite familiar with the Japanese pension system, but my knowledge of Australian superannuation is limited. From my understanding, employers are obligated to contribute around 11% of an employee’s salary on top of wages into a superannuation fund. This fund can then be managed and invested, for example, into the S&P 500. I find this similar to how Japanese companies are obligated to pay half of health insurance and pension contributions, which seems to be around 9% for the pension portion.
Source:
https://www.kyoukaikenpo.or.jp/~/media/Files/shared/hokenryouritu/r7/ippan/13tokyo.pdf
I’ve done some rough research on Japanese pension payouts. It seems that the maximum pension amount of around 300,000 JPY per month (Approximate figure, varies depending on conditions) can be received if someone worked for 54 years and contributed the maximum pension amount (118,950 JPY in total, with a monthly salary of around 650,000 JPY). The article notes that achieving the maximum 厚生年金 of about ¥303,000/month requires someone to start working immediately after junior high school and continue working without interruption until age 70 under the highest salary bracket.
Source:
https://biz.moneyforward.com/payroll/basic/54517/
I then tried some rough calculations for the Australian superannuation system using the same contribution amount. If an 11.5% contribution equals half of 118,950 = 59,475 JPY per month (for comparison purposes, assuming equivalent contribution amounts), and assuming an average rate of return of 6–8% (which seems plausible based on publicly available sources, not guaranteed), the result would be something like:
6% return: Around 272,000,000 JPY
8% return: Around 583,000,000 JPY (assuming my calculations are correct)
This fund could then be withdrawn after 54 years and invested in something like the S&P 500 with a 4% annual withdrawal rate, giving:
6% scenario: Around 10,800,000 JPY per year
8% scenario: Around 23,300,000 JPY per year
Even assuming a more realistic working period of 40-50 years, the Australian superannuation system still seems to end up with significantly higher payouts:
40 years:
6% return: Around 113,000,000 JPY. 4,520,000 JPY per year
8% return: Around 192,000,000 JPY. 7,680,000 JPY per year
Not to mention that if the employee contribution portion were also allowed to be invested and managed, the total amount could potentially double. However, if I think of the employee contribution portion as part of income tax instead, the comparison looks something like this:
Japan: 1) Income tax 2) Residence tax 3) Health insurance 4) Pension
Australia: 1) Income tax (majority) 2) Medicare levy
These seem to end up around a similar total deduction percentage.
(and then 9% vs 11.5% employer contributions)
The main advantage I see, aside from the potential (not guaranteed) higher returns from compounding, is that the Australian superannuation system allows a lump-sum withdrawal that can be managed independently in retirement. This means that if someone passes away early, the remaining funds can be passed to their family. Of course, there are downsides too, such as the need for personal responsibility and financial literacy, and there have been news about superannuation scams.
If anyone has knowledge about this, could you confirm whether my understanding is correct, or point out where I might be mistaken? Am I being too naive and is this just a too-good-to-be-true dream?
- Is it fair to say that if two people contribute similar amounts throughout their working lives, an Australian resident is more likely to end up with a larger retirement balance, assuming things go well, because of the compounding nature of the superannuation system?
- Are there downsides of the Australian super system relative to the Japanese pension system that I’m missing?
Thank you,
by FreeAlpaca4