firmly in place has been confirmed through an abundance of historical evidence.
An empty-shell law to extend retirement age should be rejected
The OECD had long recommended earlier retirement before suddenly reversing the course in 2002. It now urges late retirement to cope with the fast aging society. The OECD projects the ratio of those aged over 65 to the entire population in its member countries will increase to 17.7 percent in 2020 from 13 percent in 2005. (Korea's ratio will jump to 15.1 percent from 9 percent, posting the fastest growth in the OECD countries). The organization noted that many member countries have dropped their policy pushing for earlier retirement and instead tried to encourage senior citizens to work. The employment of mature aged workers is a major global current issue.
POSCO`s retirement policy change for skilled workers
POSCO decided to extend retirement age and change its wage system accordingly next year after 71.5 percent of its workers agreed on the reform in a 3-day poll starting October 27. The change has significant implication on other industries and society.
The retirement age will be extended from 56 to 58 and those who are healthy can work another two years if they want. The workers can keep the job as many as 4 years in addition.
POSCO will introduce a wage peak scheme. Under the plan, salary will go down to 90 percent of the pre-retirement level for the first year of extension, 80 percent for the second year and 60 percent for the rest two.
The company will no longer raise wages every year for those aged 52 or older. Existing workers will be exempted from the new rules until they become 56.
What makes POSCO decide to change its retirement and wage system? The company needs more skilled workers in expanding its overseas businesses, including a steel mill in Indonesia, while workers want to keep their jobs longer even for less income.
The reform is meaningful as it is an outcome of the voluntary agreement between the management and workers. Moreover, POSCO scrapped the seniority-based wage system for those aged above 52 and adopted a wage peak scheme. The move is widely seen as positive and encouraging.
Extended retirement under wage peak system
Korea should gear up in drafting policy measures to counter the fast aging society in the world. About 7 million people of the baby boom generation born between 1955 and 1963 are to retire sooner or later. Extending their retirement is an urgent issue. We should learn from Japan`s experience. Japan already extended retirement age to 60 in 1994 and to 65 in 2004, with more than 20 percent of its population aged 65 or older.
Korea began to extend retirement age with a wage peak system in 2006. Taihan Electric Wire Co. Ltd. reached an agreement with its labor union in January 2006 to extend the retirement age to 60 from 58 for those subject to the wage peak scheme. At the same year, the nation`s largest lender Kookmin Bank also adopted the wage peak program as most bankers actually retired at around 50, well ahead of the official retirement age of 58. KEPCO introduced similar program last July, allowing workers to retire at the age of 60 rather than 58 with wages peaking out at 56. Retirement age extension backed by the wage peak scheme has become popular among state-run companies from Korea Appraisal Board to Korea Resources Cop., Korea Development Bank and Export-Import Bank of Korea.
Under the seniority wage system, it is almost impossible to extend the retirement age as workers are paid more when they get older. Meanwhile, the wage peak scheme makes retirement age extension easy as it helps cut wage costs. The new program has been introduced as an alternative as labor unionists strongly opposed to abolishing the seniority wage system. Against this backdrop, the government made a big push for the change in October 2005, pledging to spend 10.7 billion won of employment insurance fund for the employers adopting the wage peak system from 2006. It believed the reform would help it counter the employment problems arising from the fast-aging population.
Many governments around the world have already extended retirement ages for senior workers and fiscal soundness of public pension funds. The U.K. announced a new retirement plan allowing workers to retain their jobs till 70 in the summer of 2003. Most British companies had run their own retirement programs, with workers usually quitting at 60. Under the new law, the British workers should continue to work until 70 or face a sharp cut in pension benefits. It was a desperate move to save the state pension system out of a crisis amid an aging population.
France started to overhaul its pension system in May 2003 to resolve the crisis of public pension funds. French President Nicolas Sarkozy has pushed the reform initiative further to improve the fiscal health of the national pension system. Under the proposal, the minimum retirement age will be raised to 62 from 60 in phase by 2018. The age of the beneficiaries receiving the minimum and full retirement pensions will increase by two years to 62 and 67, respectively. The bill passed the parliament on October 22. The policy was a desperate move to deal with the aging population and save the pension system.
But young voters in France strongly opposed to the reform out of fear that the retirement extension would mean fewer jobs for them. Their dissent is understandable as their jobless rate hovers around 17 percent.
Politicians and labor unions seeking a law for retirement extension
With domestic and international talks on retirement extension, ruling party lawmaker Kang Seong-chun and the Federation of Korean Trade Unions have proposed a law to require employers to keep their workers until the age of 60. In a open debate at the parliament on October 26, Kang claimed that the retirement of the baby-boom generation at the era of low birth rate and aging society will leads to a decline in adult population and shortage of skilled workers, which will trigger national problems such as weakening industrial competitiveness, falling economic growth potential, rising social security costs, and fiscal troubles in public pensions.1) FKTU`s Chairman Chang Suk-choon claimed that the bill would help prevent skilled workers from being forced out of the labor market. They have taken steps to garner support for the bill. Their argument appears plausible but misses one important point.
Rigid labor market
The Korean labor market has become rigid far faster than any other nations. It`s well shown in the economic freedom index developed by the Frazer Institute in Canada. The index examines how coherent a nation`s system and policy has been over economic freedom. It reviews about 40 elements under five broad categories -government size, law structure and property protection, monetary policy, free trade, and regulation over credit, labor and enterprises. Relevant to our discussion is the sub-index on labor market regulations.
The sub-index consists of six elements - minimum wage, regulations on hiring and dismissal, centralist collective negotiation, hiring costs, layoff costs, conscription system. As for the economic freedom over labor market regulation, Korea ranked 58th among 123 countries in 2000 under President Kim Dae-jung government. The ranking fell to 81th in 2003 under President Roh Moo-hyun and continued to drop to as low as 113th in 2007. It was not the end of the story. The ranking even declined further, hitting 128th among 141 countries in 2008 under President Lee Myung-bak. Germany recorded 129th at the same year. This shows the rigidity of the Korean labor market.2) More serious problem for Korea is that its ranking in the economic freedom index on labor market tumbled to 128th from 58th between 2000 and 2008. Furthermore, Korea was the second after Portugal among the OECD countries in terms of job protection or the difficulty of dismissal for full-time workers.
The overall circumstances call for the reconsideration of the proposal to increase the retirement age to 60 for the following reasons.
First, the bill proposed by congressman Kang and the FKTU entails no clauses on wage flexibility. Korean companies have been under tight seniority wage system. The rigidity has brought about an idea of a wage peak scheme for extending retirement age. If the official retirement age is raised to 60 under the existing seniority wage system, the labor market will become less flexible. It will be more desirable not to pay wages simply according to the number of consecutive years of service even under the wage peak program. POSCO decided to scrap the salary scale system for those aged 52 and above but it would be much better if they completely replace it with merit-based wage system. Otherwise, the extension of the retirement age would only add to wage costs, which in turn discourages employers from retaining senior workers.
Second, the proposed bill fails to consider the jobless youth. The OECD recommended early retirement until 2002 as a solution to the problem of high jobless rates among the young population. But as unemployment problem for senior workers has become more pressing than that of the young generations, the OECD chose retirement extension, dropping its earlier proposal. In this light, the government should draw up measures for jobless youth at the same time if the bill on retirement extension becomes a law. Otherwise, young Koreans will protest as vehemently as their peers in France.
The problems of the Korean pension system will not be fully resolved by revising the law to ask citizens to pay more and receive less. Therefore, the extension of the retirement age will likely contribute to enhancing the financial strength at the public pension funds. But this will work only when the revised law on retirement age ensures labor market flexibility.
1) OECD, OECD Employment outlook, 2002.
2) Those whose labor market was more strictly regulated than Korea in 2008 are as follows in order: Germany, Brazil, Guinea-Bissau, Egypt, Morocco, Bolivia, Paraguay, Togo, Mozambique, Venezuela, Angola, Niger, and Myanmar.
By Park Dong-un, professor emeritus of economics at Dankook University