The Pitfalls of Raising the Retirement Age: Continued Employment Is the Solution

Population aging is an unavoidable reality for our society. As life expectancy rises, more people want to keep working even after the mandatory retirement age. How to make use of older workers has become an important national task in order to ease the problems of a shrinking labor supply and declining growth potential. However, simply extending the retirement age cannot be a fundamental solution.

Japan has expanded elderly employment through its institutions. Starting in April 2025, all companies must guarantee employment for workers up to age 65. Firms may raise or abolish the mandatory retirement age. Alternatively, they may choose a continued employment system under which workers are rehired after the retirement age of 60. In practice, 67% of Japanese companies have chosen the continued employment system, securing an institutional foundation that allows any older worker who wishes to do so to work until age 65. This is regarded as an important turning point in responding to the growth of the elderly population.

Korea, too, continues to revisit the issue of extending the retirement age. In 2016, the law raised the mandatory retirement age to 60, but it produced side effects such as weaker youth employment and a rise in early retirements. The benefits were concentrated mainly among powerful labor unions at large corporations, while many other workers were instead placed in more precarious situations.

First, extending the retirement age weakens youth employment. When fewer employees leave their jobs, it becomes harder to hire new workers. The youth employment cliff has already appeared, and it is especially pronounced in large-company jobs preferred by young people. Although retirement-age guarantees may appear to provide stability for older workers, in reality they end up taking opportunities away from the young.

Second, extending the retirement age weakens corporate competitiveness. The problem is a structure in which productivity declines while wages remain unchanged. Korea’s seniority-based wage system further exacerbates this problem. If mechanisms such as the wage peak system do not function properly, extending only the retirement age will cause labor costs for firms to surge. This inevitably leads to reduced investment and fewer jobs.

Third, extending the retirement age actually increases early retirement. Rather than allowing workers to stay until retirement age, ordinary companies respond by expanding honorary retirement or pressured resignations. Contrary to the policy’s intent, older workers are pushed out of the labor market even earlier. It produces results exactly opposite to what the system was meant to achieve.

The alternative is not legal compulsion but a continued employment system. As the Japanese case shows, it is desirable to provide opportunities for continued service through rehiring even after retirement. This should be accompanied by a performance-based wage system, the establishment of a wage peak system, and more diverse working conditions. Rather than mandating the retirement age by law, the government should create an environment in which firms can make use of a variety of employment arrangements.

In conclusion, extending the retirement age is not the solution. It blocks jobs for young people, reduces business vitality, and fails to guarantee stable employment even for older workers. Korea should draw on Japan’s experience and establish a flexible employment structure centered on rehiring rather than simple extension. That would be a path that benefits every generation.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 정년 연장의 함정, 해법은 계속고용제다

Author: Sung-no Choi

Date: 2025-09-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28035