Business Measures regarding Trade Union Demands for Extension of Retirement Age

Korea is one of the fastest aging countries in the world, becoming an “aging society” in 2000 with people older than 65 exceeding 7% of the total population. Korea is expected to become an “aged society” by 2018 with people older than 65 exceeding 14% of the total population. Measures must be prepared to deal with an aging labor force and shrinking population.

Japan, for example, has actively promoted employment policies for the elderly since the late 1970s, when the numbers of elderly people exceeded    7% of the total population. As a result, the retirement age has been set at 60 for all companies. Now, the Japanese government is seeking to extend retirement age to 65. In Korean law, Article 19 of the Act on Prohibition of Age Discrimination in Employment & Aged Employment Promotion states ‘When an employer sets retirement age, he/she shall endeavor to set it at 60 years of age or above’. Some government officials and politicians are seeking to legislate the retirement age at 60 years of age. Influenced by these trends, labor groups are demanding, through collective bargaining, that employers extend the retirement age without changes in wage or position.

But the realities of the business environment, such as a deepening crisis in youth employment, rigidity in the labor market and the seniority-based wage system are not reflected in these demands made by trade unions. In particular, extending retirement age without preparation of legal tools to let go of low-performing employees will only deepen the rigidity of the labor market and weaken competitiveness of companies. Problems related to trade union demands for unconditional extension of the retirement age must be acknowledged in the course of rational preparations to utilize older workers.

Trade unions demand the retirement age should be set at 60 years of age according to Article 19 of the Act on Prohibition of Age Discrimination in Employment & Aged Employment Promotion. They also demand that retirement age be set higher than the age of eligibility for Old Age Pension stipulated in the National Pension Act, Article 61, Clause 1.

But the age of eligibility for Old Age Pension is expected to be adjusted higher to 65 years of age by 2033. This means the trade unions would demand retirement age to be set to 65.

Trade unions are also demanding that employers reach agreement with the trade union before making any changes to wages or the HR system. Other demands include unconditional extending of the retirement age at workplaces with reverse seniority systems (banks etc.), which are claimed to be discriminatory against older workers.

But the following factors suggest that trade unions are not considering the reality of the business environment. First, the Act on Prohibition of Age Discrimination in Employment & Aged Employment Promotion recommends the retirement age be set at 60. It does not stipulate legal obligation for employers to set the retirement age at 60. Moreover, if the retirement age is extended through linkage with the age of Old Age Pension recipients, labor costs will rise to a point that places additional financial burden on companies.

Second, extending the retirement age without making improvements to the seniority-based wage system and decreasing the rigidity of the labor market will only worsen employment instability for older workers. In particular, wages tend to go up according to worker promotions in a seniority-based wage system, which automatically causes labor costs to increase. This factor may force older workers to retire early.

Third, declining productivity is also a burden for companies when extending the retirement age. According to Table 3 below, the gap between wages and productivity increases 5 times for older workers (older than 55). Companies would be responsible for covering this productivity loss.

* Source: Korea Labor Institute

Fourth, due to limited financial resources, rising labor costs to keep older workers would reduce the ability of enterprises to hire new employees. According to a recent survey conducted by the KEF of 316 companies and 700 university students, 54.4% of companies and 66.4% of university students responded that retirement age extension and re-employment of older workers would negatively affect employment of young people.

Introduction of a wage peak system or performance-based wage system should be considered before extending retirement age. Wage peak systems are classified into 2 types. First is a ‘guaranteed retirement age’ which guarantees employment until the retirement age, with wages adjusted after a certain age. The other type is ‘employment extension’ which extends the retirement age but adjusts wages according to the time extended beyond the original retirement age. Trade unions claim that wage peak systems amount to wage discrimination against older workers, but companies have no other choice but to adopt such systems to handle labor costs as wage levels are determined by position in the current seniority-based wage system.

Extending retirement age is not the only way to utilize the experience and skill that older workers possess. Among the ways that can be considered is re-employing them in positions with less work or hiring them as workers in a subcontracted company. In the heavy industries, significant numbers of retired workers were hired as subcontract workers last year and have been using their skills in the workplace. This has brought satisfying results to both retired workers and the companies they work for.

Finding ways to utilize older workers is necessary to minimize the social costs of retired workers unprepared for their later years, and to prevent a decrease in competitiveness of enterprises due to a shortage of skilled workers. However, employers need to stand firmly against trade union demands for unconditional extension of the retirement age, something which will increase labor costs and create further inflexibility in human resource management.