The Obstacles to Shifting Mandatory Retirement to Employment until 70: Sweeping Reforms to Wages and Mid-career Hiring, etc.

TSURU Kotaro
Program Director and Faculty Fellow, RIETI

Ensuring that older workers have the opportunity to work until they are 70 if they wish to do so is one of the reforms being considered toward achieving a stable social-security system for all generations, which has been identified as the greatest challenge for the Abe Government. Specifically, a system is scheduled for consideration wherein companies would provide a number of employment options according to the wishes and capabilities, etc., of individual employees, on the proviso that the system under the existing law, wherein the mandatory retirement age is 65, remains unchanged.

However, would leaving the current system of mandatory retirement at 65 unchanged and grafting on a new system for employment until 70 really be functional? In order to answer that question, we must first understand the issues with the current system before considering the design of a new system.

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The desire to work among the elderly is high in Japan, and it is clear that Japan's lengthening healthy life expectancy creates an environment where it is becoming even easier to encourage the elderly to work. On the other hand, the mandatory retirement system currently in place is obstructing this. The mandatory retirement system forces people to retire once they reach a certain age, and from the perspective of preventing the payment of wages that exceed the productivity generated by workers, the retirement age is closely linked to Japanese companies' deferred wage system (in which the wage curve goes up sharply with age and time with the company).

Therefore, delaying the retirement age would cause significant problems, as it would mean that companies would need to completely change their wage structures. This can be gleaned from the fact that it took nearly a quarter of a century to raise the retirement age from 55 to 60, in line with the age at which the pension is paid, and to make it enforceable. Therefore, an approach was taken wherein companies can choose from abolition of the fixed retirement age, postponement of retirement, or continued employment, when the age at which the pension is paid was raised from 60 to 65.

However, as stated in the previous paragraph, abolition of a fixed retirement age or postponement of retirement in combination with a revision of the wage system creates a very high hurdle for companies. Therefore, over 80% of companies chose to adopt a system wherein they retain the retirement age of 60, and once that age is reached, they replace the previous permanent employment contract with a new contract with much lower wages. Then, in April 2013, it became mandatory to offer continued employment to all employees that wish to take advantage of it, even though it was originally an aspirational goal.

However, a continued employment system up to the age of 65 involves the same shortcomings as the current employment system has, and it is difficult to imagine that it would be sustainable going forward.

Instituting a large change in basic wages after the mandatory retirement age has been reached despite maintaining the same work responsibilities may be deemed to be illegal and invalid, as it creates an unreasonable difference in labor conditions, so elderly workers would need to be placed in positions with different responsibilities to those before retirement; however, in that case, it would be difficult to make full use of those highly experienced employees. Such conditions are likely to decrease the motivation of employees and are likely to be disadvantageous to both employers and employees.

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In order to analyze the status of users of the continued employment system, I focused on the 2017 Internet Survey on Job Transfer, Relocation, and Retirement (hereinafter the "Survey") undertaken through the Research Institute of Economy, Trade and Industry (RIETI) that I jointly conducted with KUME Koichi, who is an associate professor at Toyo University. Using the Survey, I studied college-educated workers in their 60s that had worked at large companies prior to reaching the age of 60 and compared those that chose the continued employment system after reaching the mandatory retirement age with those that chose to pursue other employment options, such as moving to another company around retirement age. The following points became clear as a result.

First, those that followed the path of continued employment chose to do so because they were able to make use of the skills, experience, and connections they had developed at their company; the employment situation was stable; and they did not have to look for work; in contrast to those who chose another option. But, there was no significant difference between the groups in terms of job suitability, which indicates how well suited an individual's job is for them.

However, even controlling for a broad range of factors such as work style, work content, type of employment, industry, occupation, and personal attributes, people that follow the path of continued employment are subject to a larger drop in wages after reaching the mandatory retirement age and receive lower hourly wages than those that do not. Also, even when wages are controlled for in addition to the above variables, the job satisfaction of those that engaged in continued employment was low.

In addition, when the same methods were applied, the desire to work among workers aged 65 or older was lower among those that chose continued employment than those that did not, even if the trend to postpone mandatory retirement to 65 was strong among those that chose continued employment.

In consideration of these circumstances, although those that engage in continued employment enjoy the advantages of stable continuation of their work, it is questionable whether they achieve job satisfaction, or whether they are merely supporting themselves through continued employment until they can receive their pension. Even if the age of continued employment is raised above 65, if the current system, including the age at which the pension is paid, does not change, it is unclear whether employment after 65 would actually be additionally encouraged.

This analysis is scheduled to be published by RIETI in the form of a paper titled Employment Patterns After Mandatory Retirement and Their Evaluation: Focusing on Continued Employment.

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Based on the above analysis, I would like to make a few proposals. First, in order to encourage the employment of people aged 65 and older, it is necessary for options other than continued employment to be promoted and chosen more often after retirement. The analysis in the paper mentioned above shows that employees with career experience in changing companies chose an option other than continued employment at a higher proportion to those with no such experience (refer to the graph below).

Graph: Experience changing jobs also affects work options after retirement
Graph: Experience changing jobs also affects work options after retirement
Note: People that chose an option other than continued employment may have considered their new place of employment after retirement to be their first "job change," so we focused on two or more job changes in order to exclude anyone that had not changed jobs prior to retirement.
Source: Research Institute of Economy, Trade and Industry Internet Survey on Job Transfer, Mobility, and Retirement (2017)

Therefore, it can be said that experience changing jobs prior to reaching retirement age is important, and therefore employment of the elderly and expansion of mid-career hiring, which is a major policy issue for the current government, are complementary policies. Also, the desire among people aged 65 or older to become independent workers, freelancers, or individual subcontractors, is high, so the promotion of these kinds of quasi-employment options is also an issue to be addressed.

Second, we must raise the level of job satisfaction among users of the current continued employment system. The analysis in the paper mentioned above also found that job satisfaction for those that chose continued employment is higher than for those that did not, if they are involved with education of juniors and young workers, or maintain specialist roles relating to their work responsibilities prior to turning 60. Therefore, if the aim is for continued employment after retirement, employees must continue to hone the necessary skills, abilities, and specialties required by companies after reaching retirement age.

Third, we must comprehensively revise the deferred-wage system. If adjustments are made so that wages and productivity are roughly in alignment prior to reaching the mandatory retirement age of 60 by smoothing out the wage curve for middle-aged and elderly workers, it would not only ensure profitability, but it would put companies in a position to allow elderly workers to continue working in the same workplace if they wished. Then, there would be no reason to continue the mandatory retirement system as a legal obligation.

However, the wage system has been developed over many years so that it has advantages for both employers and employees. It is no exaggeration to say that this would be the most difficult part of Japan's employment system to reform. If Japan were to take a stand against age-based discrimination by abolishing mandatory retirement similarly to the English-speaking world, namely the USA, the UK, Australia, and New Zealand, where mandatory retirement is forbidden, it could be a clever way to comprehensively revise the wage system.

I hope that consideration is given to the complementary nature of the various elements of the employment system as described above when promoting the employment of the elderly.

>> Original text in Japanese

* Translated by RIETI.

January 16, 2019 Nihon Keizai Shimbun

March 6, 2019