[Thomas Klassen] Korea needs to retire mandatory retirement

Mandatory retirement at a very young age, often in the mid 50s, is a defining feature of Korean workplaces. After being forced to retire so early, workers face a long period of low paying and precarious employment either in self-employment or contract work. Not surprisingly, Koreans have working lives that are among the longest in the OECD and cannot fully retire until age 70.

Mandatory retirement, supported by government policy, has remained unchanged over the past several decades notwithstanding significant labor market, demographic and economic transformations. However, in a country with a rapidly aging population, now is the time to relegate mandatory retirement to the dustbin of history.

Other countries have already done so. The United States did so in 1986, Australia and New Zealand in the 1990s, Canada a few years ago, and the United Kingdom earlier this year. In European Union countries mandatory retirement is still permitted but must be justified and cannot occur before the age of pension eligibility. Japan increased its age of contractual mandatory retirement from 55 to 60 in the 1990s.

In Korea, the debate on how to reform retirement policies is mired by three misconceptions.

First, is the widespread belief that forcing older workers to retire creates jobs for younger workers. This is not the case. It is now well recognized by economists that retiring older workers will not create employment positions for young people in the economy as a whole. To argue otherwise is the “lump of labor fallacy” ― that there are a fixed number of jobs in the economy. Limiting employment opportunities for some workers ― such the old or women ― results in an overall decrease in economic activity and decline in the total number of jobs.

The second misconception is that older workers are less productive than their younger counterparts. The productivity of older workers has been subject to extensive study and the results are clear: productivity is not related to age. The only exception is for jobs that require maximum physical exertion, of which there are fewer and fewer. There is no evidence that any specific age marks the beginning of a decline in work-related abilities for any group of workers.

The president of Korea is 70, and many other politicians are in the 60s and 70s. Many business leaders are in this age group as well. If productivity was related to age, then surely this relationship would apply to them as well.

Third, there is the belief that older workers are too expensive; in other words, older workers are paid more in compensation than their current worth (or productivity) to the firm. Although employers make this argument, there is little empirical evidence. Even if it were so, there is a ready solution for this; namely, a peak wage system. Under such a scheme, the wages of older workers are capped. Most Korean workers in their 40s and 50s are willing to accept such a compensation scheme in return for being able to remain employed longer.

The experience of other nations during the past 25 years is unambiguous. When mandatory retirement is lifted, younger workers are not disadvantaged; productivity does not suffer; and compensation levels remain stable.

In Korea new retirement policies are now needed. People are studying longer and thus starting work later than in the past. At the same time, they are living longer, well into their 80s. Clearly, retirement while still in their 50s makes less and less sense for most people and for the government.

Removing early retirement will also increase the fertility rate in Korea, which is very low. Most couples have children in their 30s. Parents understand that they will have university tuition and other expenses for their children when they are forced into an early retirement. As such, they often make the choice to have only one child, or no children at all.

Not only will banning mandatory retirement help families, it will decrease government expenditures. People who are employed at good jobs pay taxes and are able to take care of themselves. Those who must survive on meager savings or insecure employment income rely far more on government social and health programs.

What would happen if the mandatory retirement age was increased to 60 in 2014, and then one additional year thereafter, with employers banned from forcing productive workers to leave before these ages? Some workers would continue to retire in their 50s from their main job, while others would remain employed for three or four additional years.

A small number ― and only the most motivated ― would stay employed for longer. Pay schemes would need to be revisited in some sectors of the economy, including the introduction of a peak wage system. Finally, there will be no increase in youth unemployment rates due to the elimination of mandatory retirement, and the productivity of enterprises would not decline.

The scenario sketched above differs considerably from that often presented by Korean employers, as well as union and government officials. The future offered by them should mandatory retirement be banned ― at least for public consumption and for negotiation tactics ― is one filled with workplace chaos, intergenerational conflict and loss of productivity.

Yet, in fact, none of this will occur if contractual mandatory retirement is eliminated in Korea. Workplace reforms would occur, especially in regard to peak wages, but these would be predictable and gradual.

What is needed to launch reforms to mandatory retirement policies?

First, a willingness by government, employers and unions to engage in evidence-based policy making. For example, to stop stating that youth unemployment will increase if more workers in the 50s remain employed when this is not true. Second, recognition that mandatory retirement ― that is firing someone because of a non-work-related characteristic ― is discrimination.

Lastly, workers and their families must begin to speak out. This is difficult in workplaces and in unions where those doing so will be seen as selfish. However, when citizens speak out on the unfairness and hardship that mandatory retirement causes, politicians will begin to listen. 

By Thomas Klassen

Thomas Klassen is a professor of political science at York University in Toronto, Canada. He was in Seoul earlier this year as a visiting researcher at the Korea Labor Institute. His email is tklassen@yorku.ca. ― Ed.