Labor representatives from the Korean Confederation of Trade Unions and the Federation of Korean Trade Unions hold a joint press conference calling for legislation to raise the mandatory retirement age to 65 at the National Assembly's Communication Hall in Seoul on June 16.YONHAP
Kwon Soon-won
The author is the dean of the Graduate School of Business at Sookmyung Women’s University.
In Korea, turning 60 marks hwangap, the completion of the traditional 60-year zodiac cycle and the symbolic beginning of a new stage of life. Philosophically, it represents renewal. Economically, however, it often marks the loss of a primary job before workers become eligible for a full public pension. The resulting income gap is not a matter of personal failure but of institutional design.
The figures illustrate the challenge. Although the National Pension Service (NPS) targets a 43 percent income replacement rate, the actual figure is only about 33 percent, roughly 10 percentage points below the Organisation for Economic Cooperation and Development (OECD) average. The poverty rate among older Koreans stands at 39.7 percent, the highest in the OECD and nearly three times the average of 14.8 percent.
In a country where employer-based welfare remains a key safety net, extending employment effectively extends welfare. The issue is therefore not whether the retirement age should be raised but how. Yet proposals often raise concerns about reduced youth hiring or increased early retirement. Ironically, the two generations expected to benefit can both suffer.
Labor economist Edward Lazear explained this dilemma in his 1979 paper, “Why Is There Mandatory Retirement?” Seniority-based wages operate as deferred compensation: Younger workers earn less than their productivity while older workers earn more. The arrangement encourages long-term service, but it requires mandatory retirement to end the period when wages exceed productivity. Retirement and seniority-based pay are therefore inseparable.
That insight remains relevant. Extending the retirement age without reforming the wage system simply prolongs the period during which wages outpace productivity. Studies by Hellerstein and Neumark found that wages rise faster than productivity with age. The OECD concluded in “Working Better with Age” (2018, 2019) that this gap is particularly large in Korea and Japan, increasing pressure to push older workers out of primary employment. The central issue is therefore wage structure rather than age itself.
Korea's personnel system magnifies the problem. The internal labor market described by Peter Doeringer and Michael Piore, in which hiring occurs mainly at entry level while promotions and pay are determined internally, is especially prevalent in large Korean companies. When labor costs rise, firms tend to reduce recruitment of new graduates rather than adjust existing employment. Korea's seniority-based wage curve is also among the steepest in the world, making retirement-age extensions more expensive than elsewhere.
International evidence suggests that retaining older workers does not necessarily reduce youth employment. A 12-country National Bureau of Economic Research project led by Jonathan Gruber, Kevin Milligan and David Wise found no evidence supporting the “lump of labor” theory. Later studies, including research by Marco Bertoni and Giorgio Brunello (2021), reached the same conclusion.
Korea, however, is an important exception. Research by the Korea Development Institute found that extending employment for workers aged 55 to 60 reduced employment among those aged 15 to 29 in private firms, particularly large companies with strong seniority-based pay. A 2025 Bank of Korea study likewise found that the benefits of retirement-age extensions were concentrated in unionized large corporations. KDI also reported that firms anticipated higher labor costs by encouraging workers to retire before reaching the statutory retirement age, paradoxically shortening actual careers.
These outcomes are not inevitable. They arise when longer careers are combined with rigid seniority-based personnel systems. If institutions created the problem, institutional reform must provide the solution.
The first priority is wage reform. Following Lazear's logic, narrowing the gap between wages and productivity lowers the cost of extending employment. Compensation should depend more on job value and performance than years of service. The OECD has repeatedly recommended this approach, and countries including the United States and Britain have expanded employment for older workers without serious generational conflict under more market-based wage systems.
Second, personnel systems must also change. Reforming wages alone is insufficient if promotion continues to depend on tenure. Korean companies still rely heavily on hierarchical career ladders, leaving older workers concentrated at the top while limiting opportunities for younger colleagues. A lattice-style career structure would allow experienced employees to move laterally into specialist roles such as mentoring, quality control and safety instead of management. Older and younger workers would then complement rather than replace one another. Transparent performance evaluation is equally important to prevent performance-based pay from becoming a tool for age discrimination, as Japan recognized when revising evaluation and compensation standards for rehired employees.
Finally, legal institutions must support the transition. Reforming wage and personnel systems generally requires employee consent under Article 94 of Korea's Labor Standards Act because such changes disadvantage existing workers. Employers seek greater flexibility while labor unions fear wage cuts. Both concerns are legitimate. Rather than weakening consent requirements unilaterally, policymakers should negotiate retirement-age extensions together with wage and personnel reforms while establishing safeguards such as minimum pay standards, nondiscrimination rules and dispute-resolution procedures. Japan's experience offers a useful lesson: Although extending employment through postretirement rehiring succeeded, steep wage reductions weakened motivation and productivity, leading to the adoption of the principle of equal pay for equal work in 2020. Korea should likewise pursue gradual reform aligned with pension eligibility, allowing employers time to adapt without encouraging premature layoffs or reduced hiring.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
