Surfing zanes that you may be, you might have noticed the banner ads at the Japan Today site, from a firm called Capital Tax, Ltd. The offer is that for 7% of your 脱退一時金
daitai dattai ichijikin or One-Time Lump Sum Withdrawal, Capital Tax will put the paperwork in order for you to claim a pension refund.
All you need do is click on that banner, like so:
(It’s clickable! Just like the real one, and I don’t ask a dime.)
Now, is this offer a good idea?
It really depends. Japan instituted the Lump Sum Withdrawal back in the 1990’s, because most foreigners were seen to be here about three years. At the time, Japan didn’t have any totalization treaties. So if you weren’t planning on sticking around for 25 years to vest in a Japanese pension, it truly was lost money.
These days, however, Japan has totalization with the major countries of the Anglosphere, including the United States. Everyday readers please bear with me as I explain, but totalization allows you to take whatever time you put into the Japanese system, and combine it with home country pension (social security) participation. So if you put 3 years into the Japanese nenkin system, and gain another 22 later in U.S. social security, Japan will pay you a pension on the 3 years’ worth of contributions. This is because you have a total 25 years between the two systems.
I keep telling people that I totalized very quickly in the Japanese system, because I brought something like 23 years over from my work in America. When you start paying into social security at age 15, that is not so hard to do . . .
There are some cases where you would want to make a withdrawal from the Japanese program. One obvious one is that if, for some reason, you learned that you weren’t going to make it to 60. Then, obviously, you would take your money now. If you had some incredibly bad financial setback, and the wherewithal to get back on your feet before retirement, that might be another case—like cashing in your 401(k).
But I can think of a number of reasons why you want to keep your nenkin money with the Japanese.
1) You do not get 100% back. And I’m not talking about the 20% withholding the tax man puts on. Rather, the Japanese have a pro-rated formula for how much will be refunded. I think it has to do with the fact that you take a tax deduction for nenkin contributions; but don’t hold me to that explanation. Bottom line is you don’t get it all back.
1a) As an aside, it’s obvious that if you have, say, 5 years in, it’s definitely not worth cashing in just for the three years. You’ve forfeited two years of building an annuity. There are people who have done this, and now they can’t get the credit back in the Japanese system.
2) The closer you are to retirement, the more valuable the annuity, the stream of payments at retirement, becomes. For one, your odds of making it to retirement age are better. But additionally, the defined benefit formula works for you. The amount the government asks of you is the same if you are 20 or 55. But the time value of money means that you get a much better return over 5 years, than the 20 year old gets over 40.
3) The Japanese pension is inflation-protected. If there ever were yen inflation again, your future check is adjusted for this. Additionally, there is some factor for wage growth in the economy.
The short end of it is that you can’t really buy a guaranteed life annuity stream like the Japanese pension for the price the government offers it at. You would have to rely on risky investments and hope you can match the return. Why do it that way, when you can easily have the piece of mind of a government check?
[Update: Japan’s quite a place in that regard, isn’t it? There is very weak pension enforcement. Though, if you do happen to get into the pension, there are people who will help you cash out!
Many of the true short-timers don’t pay in, so the likelihood is that it would be the people who have more substantial money in the thing who might take up the offer of a refund. Those would be the people who might be most disadvantaged by taking the money, rather than leaving it in . . . ]