No.29   July 1, 2001   Designing Pension Systems for a Knowledge Economy   Masatoshi KURATANI and Yukihiko ENDO       When an ideal approach to pension systems is considered, it is essential that the analyses include pension funding and the divergent effects of pension systems on the real economy. As the importance of intangibles (intangible property) is increasing in the real economy, significant developments are occurring in the emergence of a knowledge economy. This trend is most remarkable in the United States, which possesses a strong socioeconomic environment that encompasses lifestyles, the labor market, company organizations, market infrastructure, city functions, and financial and capital markets. Japan must promote a knowledge economy and raise productivity more than the United States in the 21st century because its working population is projected to decline. Promoting a knowledge economy to raise productivity requires laying the groundwork to give Japan's socioeconomic environment greater flexibility. It is desirable to design an appropriate pension system to coexist with this development. But the disincentive effects created by the present corporate pension plans and public pension system in Japan will make some of the various aspects of the socioeconomic environment less flexible, which will consequently hinder the progress of a knowledge economy in the future. These undesirable consequences could be avoided by changing the present corporate pension plans to create other systems that allow firms and employees to flexibly choose alternatives such as defined benefits or defined contributions. It is also desirable to adjust the benefit levels of Japan's public pension system to control the increase of future liabilities and to introduce individual pension accounts as early as possible. At the same time, organized reforms must take place in the financial and capital markets closely linked to the effectiveness of the pension system to (1) improve the investment skills of institutional investors, (2) develop diversified products, (3) enhance investor education, and (4) provide new risk management services that match an individual's life cycle. Contents I The Diverse Effects of Pension Systems on the Real Economy II The Emergence and Socioeconomic Environment of a Knowledge Economy 1 The Importance of Intangibles 2 The Flexible Socioeconomic Environment in the United States 3 Current Conditions in Stagnating Japan III Pension Products, Corporate Pension Plans and the Public Pension 1 The Strengths and Weaknesses of Pension Products 2 Corporate Pension Plans That Overemphasize Stability 3 The Vicious Circle Generated by the Current Public Pension IV Pension System Reform for an Emerging Knowledge Economy 1 The Importance of Pension System Design 2 The Orientation of Pension System Reform 3 The Need for Financial and Capital Market Reforms GO to PDF