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Opinion

Japan must abolish mandatory retirement

With labor short, workers should be free to work beyond 60

Many Japanese companies get around compulsory retirement with ad-hoc measures such as the temporary rehiring of older workers.

At a time when Japan's aging population is running short of workers, it is time to do the obvious -- scrap the obsolete rule which forces most people to retire at 60 or soon afterward.

Mandatory retirement, which was originally devised to protect older people from exploitation, today robs a country that is starved of labor of a valuable source of workers. It also discriminates against the over-60s in a way which would be illegal in many other developed nations. Economic sense and justice demand that this arbitrary rule should be abolished. People should be free to choose when they retire.

Under Japanese law, major Japanese companies and organizations are required to have their workers retire when they reach a certain age. Starting with 50 in the pre-Second World War years, the minimum retirement age has been raised to 60 while life expectancy has risen far more dramatically.

But because of a deteriorating fiscal situation, exacerbated partly by the fact that retirees are living longer, the government has taken steps to gradually raise the eligibility age for receiving public pension payments from 60 to 65 -- in stages -- by 2025. (It is currently 62). In order to avoid retirees facing some years without pension payments, securing employment until pensionable age by adjusting the mandatory retirement age has become an urgent issue.

In response, the revision of the law in 2012, which aimed to guarantee employment until pensionable age, required companies to choose from three options; (a) raise the retirement age, (b) ensure continued employment until 65 but with reduced wages to lessen the burden on employers, or (c) abolish the mandatory retirement age altogether.

Many companies are likely to opt for the second option, namely continued employment with reduced wage, because economically it is the most cost-effective solution. But forcing people to exit from the labor force at a certain age -- or cutting their pay -- when they have the ability and the will to work is inefficient and unfair. Why is such an inefficient system accepted in a country experiencing a serious age-related decline in the population and struggling to cope with a growing labor shortage?

Both employers and employees see benefits in the present system. For an employee, mandatory retirement goes with long-term employment and guarantees that he or she will not be fired before retirement age. Under the Japanese labor law and practice, it is almost impossible for an employer to fire an employee even with unsatisfactory performance.

Mandatory retirement is observed in almost all major companies and the government, while it is seen in less than 80% of smaller companies with fewer than 30 employees. Mandatory retirement is closely related to wage and promotion system of major Japanese companies, which usually have systems called "life-time employment" and "seniority wage system."

Although life-time employment never guarantees literally "life-long" employment, once you join a company at the entry level, you can expect to stay on until you reach the mandatory retirement age. Annual pay increases based on age and experience can be enjoyed until retirement. Job titles will also be adjusted upward to reflect the advancement in age. In this system, mandatory retirement at the fairly early age of 60 provides a rare channel for the employer to reduce employment. It can be seen as a necessary evil.

But recent change facing Japanese companies, including global competition, a drive for increased flexibility and skill shortages, are encouraging executives to review their wage and promotion systems. Companies are starting to adjust employment levels more flexibly and encouraging younger employees to change jobs more freely. Wage structures which used to emphasize seniority aspect are being modified in more innovative companies to incorporate performance. Mandatory retirement as a corollary of life-time employment is becoming untenable.

Moreover, mandatory retirement is not sustainable in an era when diversity in labor force should be embraced. Just as employees should not be differentiated by gender or ethnic background, they should not suffer discrimination by age.

Hesitancy toward hiring more female and foreign workers in Japan is partly a reflection of the anxiety held by employers that these groups will not fit well with long-term employment and seniority-based wage systems. Nevertheless, employers are steadily recruiting more women into mainstream jobs that were once a male preserve, and more foreigners. The Japanese economy is slowly making progress in reducing discrimination against gender and nationality. How about age discrimination?

Some would argue that respect for elders is deeply embedded in the Japanese culture and therefore cannot be changed easily. But, respect for elders in family, community and social gatherings should not be brought into companies or other work organizations.

The issue is not straightforward because although mandatory retirement applies to most employees in major companies, it does not cover the most senior executives. Those who reach board level can expect to stay at work for a decade after 60 -- and longer. Hence, frequent photographs of Japanese company boards showing a row of elderly men (rarely any women).

Even when the top executives finally give up their posts, high-status positions are found for them as advisers. Indeed, it has become a real problem that some senior executives continue to exert significant influence even after they have stepped down from executive posts. This amounts to an improper mix-up of respect for elders in family life and effective management in large companies.

A full-scale reform of mandatory retirement, including its abolition, cannot be envisaged without a complete review of labor market policies and practices, because without such a system companies lack mechanism to sack people for incompetency or redundancy. Moreover, wages and promotion would need to be determined on the basis of ability, as is the case in many European and North American countries. These changes require fundamental shifts.

Unfortunately, the work-style reform currently discussed at the Diet, which primarily concerns reducing overtime work and introducing equal-pay-for-equal-work principles, does not include measures to fundamentally alter the mandatory retirement system. Lifting the mandatory retirement age further is like kicking the can down the road.

A system that was introduced in a young and rapidly growing economy cannot and should not survive in a mature and barely growing economy. Japan should consider seriously abolishing mandatory retirement. Different work styles such as flexible part-time working and flexible job-hopping should be allowed.

Abolishing mandatory retirement should not be regarded as a proposal to allow older workers to simply stay put. On the contrary, they should be encouraged to change jobs freely according to their ability, knowledge, aptitude and preferences. The importance of life-long education cannot be over-emphasized.

At the same time, overly generous privileges for the elders, such as pensions, reduced health care costs and preferential fees should be curtailed. Overcoming these hurdles is not easy, but Japan has to go through this process, if only out of economic necessity.

The vast majority of the so-called Japanese salary men in Japan has so far been indifferent to the need to make constant effort in building their own capacity, because they assume their jobs are secure. This security will soon vanish. It will never be too early to start preparing for the days when life-time employment no longer exists.

Shigeo Kashiwagi has been teaching economics at Keio University since 2007. Prior to joining academia, he spent 34 years in the Japanese Ministry of Finance, during which he served as Japanese Executive Director at the International Monetary Fund and the Asian Development Bank. After his mandatory retirement from Keio in 2016 at age 65, he continues to teach as guest professor, while sitting on board of private companies as an independent member.

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