[Job Performance Bonus Solution] ⑤ Seniority System Cannot 'Extend Retirement Age'... "Need to Create Success Cases"

To Extend Retirement Age... Start with Introducing Job Performance Bonuses
Find 'Success Cases' Mainly in IT and Venture Companies
Need to Seek Bold Support Measures Beyond Tax Benefits
Bring Large Labor Unions to the Table for Discussion

Changing the wage system to a performance-based pay structure is also necessary for the key national task of 'extending the retirement age' in South Korea. Due to aging and low birth rates, the working-age population is steadily decreasing, so the retirement age for the elderly must be extended further. However, under the current seniority-based wage system, companies cannot bear the increasing labor costs. For this reason, some suggest that a mutually agreeable approach is needed between the labor sector, which desires retirement age extension, and the government, which is pushing for wage system reform. There is also an opinion that the government should create 'successful cases' of performance-based pay so that companies and workers themselves recognize the need for wage system reform.

At the 11th Suwon City Senior Job Fair, elderly participants are looking over the job information bulletin board. [Image source=Yonhap News]

Key Task 'Retirement Age Extension'... Difficult Without Wage System Reform

Extending the retirement age is a long-standing issue in South Korea's rapidly aging labor market. According to Statistics Korea, the total fertility rate last year was 0.79, far below the OECD average of 1.59. While the population and youth are decreasing due to low birth rates, the elderly population aged 65 and over exceeded 9 million last year, increasing rapidly. At this pace, by 2025, just two years from now, South Korea is expected to enter a super-aged society where the population aged 65 and over exceeds 20%. Considering that the legal retirement age in South Korea is currently 60, the number of working people will inevitably decrease significantly.

Another problem is that welfare expenditures such as pensions are increasing significantly as the elderly population grows. The government plans to delay the pension eligibility age, currently 62, to 64 in 2028 and 65 in 2033, considering the financial issues of the National Pension Service. Workers who retire before age 60 are likely to face income gaps due to the difference between retirement age and pension eligibility. The existing National Pension fund is also estimated to be completely depleted by 2055. Experts believe that to enhance the sustainability of the National Pension, the retirement age for the elderly should be extended and the pension enrollment age further delayed.

However, wage system reform is essential to achieve such retirement age extension. Professor Kim Dong-bae of Incheon National University’s Business Administration Department said at a Korea Employers Federation forum earlier this month, "To extend the retirement age beyond 60 without negatively affecting youth employment, wage system reform is necessary." Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho also stated earlier, "Uniformly extending the retirement age restricts youth employment," adding, "Since companies generally have a seniority-based wage system, discussions may be possible when the wage system changes to performance-based pay."

The 'Future Labor Market Research Group,' an expert body that designed the labor reform blueprint for the Yoon Seok-yeol administration, stated in a recommendation last December, "Seniority-based wages cause employment insecurity among middle-aged and older workers," and "In companies adopting the seniority system, the average retirement age is 49.3 years, about 10 years earlier than the legal retirement age, as more workers believe it is difficult to remain employed until retirement age." In seniority-based companies, management wants highly productive employees, but middle-aged workers’ productivity does not match their wages, leading to early retirement, which in turn exacerbates employment insecurity.

On March 3, 2021, the three major automakers Hyundai Motor, Kia Motors, and Korea GM, affiliated with the Korean Metal Workers' Union, held a press conference in front of the National Assembly in Yeouido, Seoul, urging legislation for retirement age extension linked to the National Pension Service. Photo by Moon Honam munonam@

Tax Benefits Are Insufficient... 'Successful Cases' Must Be Created

The government is supporting the introduction of performance-based pay in private companies to eliminate the side effects of the existing seniority-based wage system, but industry response remains lukewarm. The Win-Win Wage Committee, which discusses wage system reform plans, announced that it would increase tax and subsidy benefits for companies switching to performance-based pay and expand the establishment of a 'Korean-style job-specific wage information system' and consulting services. A labor sector official said, "Tax support may help companies, but it does not directly benefit employees," adding, "While increased government support might encourage some companies to seek consulting, it is unlikely to bring about significant change even after 10 years under current conditions."

Professor Jung Seung-guk of Korea University’s Graduate School of Labor Studies, who participated in the Future Labor Market Committee, said, "One of the government’s labor reform policies is to allow retirement age extension for companies that reform their wage systems, which is a very significant variable," adding, "Since workers with the strongest interest in seniority pay are in their 50s with long tenure, it is likely that agenda-specific committees involving unions will be formed in the Economic and Social Development Commission (GyeongSaNoWi) in the future." In fact, the Korean Confederation of Trade Unions (KCTU), which has a high proportion of regular workers in large companies, is negative about introducing performance-based pay but supports retirement age extension.

Given workers’ strong concerns about performance-based pay, there are calls to focus first on creating successful cases. A business sector official said, "For wage system reform to spread, there must be successful cases," adding, "Since large companies find it difficult to change immediately, it should start with IT companies, venture companies, and startups, where the culture is relatively flexible and the need is high." The official added, "For this, more radical support than some tax benefits is necessary."

Unions Must Be Brought to the Dialogue Table... Public Sympathy Is Also Needed

Choi Young-gi, a visiting professor at Hallym University and former president of the Korea Labor Institute, said, "It is not helpful for the government to unilaterally announce changes to the wage system," emphasizing, "Normalizing the Economic and Social Development Commission (GyeongSaNoWi), a social dialogue body, is a priority." Professor Choi explained, "Production workers may be strongly attached to seniority pay, but there are diverse opinions among workers in sectors like Pangyo who are not so," adding, "It is also important to bring (the KCTU and Korean Confederation of Trade Unions) to the dialogue table and expose to the public that they are only fixated on the interests of regular workers and large companies."

Lee Jang-won, senior research fellow at the Korea Labor Institute, pointed out, "A passive approach to performance-based pay as a way to escape the seniority system makes it difficult to gain sympathy from unions or employees," adding, "It is wrong to focus only on differences in compensation without building a rational reallocation of job value, evaluation infrastructure, and objective job-centered personnel systems." Lee emphasized, "Especially in the public sector, the traditional culture of rotating assignments between difficult and easy tasks must be broken first," adding, "To do this, just as private companies have recently abolished open recruitment systems, the public sector should also move toward job-specific hiring."