Baby-boom Generation Approaches Retirement Age: Coping with a Depopulating Society

Yoshio HIGUCHI (Professor, Keio University)

Baby-boomers will reach their mandatory retirement age of 60 in 2007, and as a result Japan's workforce is expected to decrease drastically. The key to alleviate any negative effect is to create a working environment in which abilities of every worker, irrespective of age or sex, can be realized. Coping with baby-boomers reaching retirement age would be a touchstone in a country of decreasing population.

Decrease of up to 1.1 million workers expected

Individuals born between 1947 and 1949 are called baby-boomers in Japan. More babies were born during that period mainly as a reaction to the end of WWII in 1945, and soon they will begin to reach the age of 60, the mandatory retirement age set by the majority of Japan's workplaces. According to the 2000 census there are 6.9 million baby-boomers, of which 5.4 million are employed. The number is 20 to 50% more than that of other generations, and they constitute 5.4% of the total population and 8.6% of all employed persons. Because more than 80% of firms maintain a mandatory retirement system age set at 60, a large number of retirees are expected when the baby-boomers reach that age in 2007.

The willingness of Japan's elderly to work is said to be higher than that of other industrialized countries. Indeed, the labor participation rate in Japan of early 60s males in 2003 was 71.2%, significantly higher than 15% in France, 33% in Germany, and 57% in the United States. Nevertheless, this figure of 71.2% is still markedly lower than that of the age group of employees in their late 50s, which is at 93.5%. If baby-boomers follow the same pattern of the current early 60s group, up to 1.1 million workers are expected to retire by 2010.

To make the situation more unsettling, according to a survey by the Labor Ministry the ratio of regular employees, which is 61% for late 50s male, has dropped to 26% for the early 60s age group. Furthermore, the ratio of early 60s employees among short-time regular workers has increased to 27%. This means regular employees in their early 60s work less hours than those in their late 50s, indicating even further decline of labor quantity and per capita productivity upon reaching the age of 60.

The large volume of retirees affects not only the retirees themselves but also the whole society. One factor is the deterioration of the household saving rate. The figure, which was 17.3% in 1980, dropped to 7.4% in 2003, lower than in such countries as Germany or France. If retired households were to increase, the rate is expected to fall further because expenditures on time-consuming travel and hobbies likely would rise, and people would draw on their savings to afford such pursuits. This would reverse the past trend and work to increase external debt.

Retirement of baby-boomers would mean a decrease of highly paid elderly from corporations and freeing up senior positions that may expedite promotion of younger workers. Although companies with insufficient retirement funds may incur increased costs temporarily, calculations show the increase should be more than sufficient to off set the decrease in gross salary, thus easing the total personal expenses of a company.

However, the effects of a dwindling workforce differ considerably among categories of industry, line of work, size of business, and geographical region. The period when baby-boomers finished education and began working, in the late 60s to the beginning of the 70s, was the high-growth period for Japan when large manufacturing companies recruited individuals in massive numbers. Because of this, the share of baby-boomers in large manufacturers is higher than those of other age groups.

The recruitment of workers by the manufacturing industry decreased substantially in the 1970s, so the number of skilled workers in younger age groups is less than that for baby-boomers. This makes the acquisition of skills difficult, which has indeed resulted in a number of large manufacturers reemploying or extending employment of aged and skilled workers.

In other lines of work, however, the picture is more or less opposite, where the share of professional and skilled workers among baby-boomers is smaller than that of younger generations, while the share of office workers is relatively high. The university entrance rate soured after the baby-boomers left schools, which spurred increase of office workers at workplaces, resulting in excess staffing. This situation could continue for a while.

Aging proceeding quickly in metropolitan areas

About one-third of baby-boomers were born in the three large metropolitan areas--Tokyo, Osaka, and Nagoya districts. But as they relocated to study and work, the ratio has risen to about one half. The problem of aging population primarily belonged to the countryside until recently, when it is increasingly becoming a concern in metropolitan areas. In that sense, the retirement of baby boomers is an issue of office workers in large cities. On the other hand, suburban areas where retirees from large city offices would locate to live could consider it an opportunity to take in those highly skilled and well-experienced people to participate in their societies.

The revised "Law Concerning Stabilization of Employment of Older Persons" came into effect in December 2004, in which employers became obliged to extend their mandatory retirement age to 65 to harmonize with the government policy to delay the start of public pension benefits from 60 to 65 yeas of age. Objections were expressed from businesses during the discussion of the bill, claiming such matters as mandatory retirement age in an employment agreement need not be stipulated in a law, but there is a legitimate background for companies to express concerns.

According to E. P. Lazear's theory, the relationship between wages and productivity is such that when workers are young, wages are suppressed below their productivity whereas when they become older, wages supersede their productivity in relative terms. In such a "deferred payment" pay structure environment, employees would work hard--even when they are not closely monitored--to avoid being dismissed for delinquency. On the other hand, aged employees would become a comparatively expensive "burden" for a company. In order to maintain such a "deferred payment" pay structure, the company needs to guarantee employment up to a certain age, while employees are required to resign at that juncture. A system so institutionalized is the essence of the retirement age system.

An analysis based upon a survey by the Labor Ministry supports this notion by showing that the retirement age system has the effect of discharging employees who are over the set age, while securing jobs for employees until reaching that age. If the retirement age system were to be abolished in the aim to expand employment of people over 60, or based on the principle of prohibition of age discrimination, massive layoffs of employees in their 50s could occur. In other words, to abolish the retirement age system, other criteria in lieu of age needs to be implemented, otherwise there would be a risk of exacerbating employment uncertainty.

To promote extended employment for aged people, the gap between wages and productivity needs to be diminished. There are two ways to do this. One is to flatten the wage curve to match employees' performance, and the other is to enhance productivity of aged workers. Indeed, analyses show that more aged people work for extended periods at companies where the wage curve is relatively flat, and which provide education and training for the aged to enhance productivity, while also implementing flexible work programs.

Skilled engineers are highly regarded irrespective of age

What then are the capabilities highly appreciated by employers even when workers become old? Among the workplaces where mandatory retirement age is set at over 61 for certain lines of work, analysis show that while 40% have higher retirement age set for managers and 15% have higher retirement age set for clerical workers, 60% accommodate specialized and technical employees such as engineers and researchers at higher ages. Indeed, specialized and technical employees are often offered extended employment. Even for those who quit a company, many are reemployed at another workplace at comparable wage levels. This demonstrates that specialized and technical employees maintain their productivity compatible with their high wages.

It must be noted however, that not every specialized and technical employee can achieve high productivity. In an environment of intensive technical innovation where skill and knowledge quickly becoming obsolete, workers must constantly update on their education and training. Whether the company can facilitate such needs, and whether employees have the eagerness to actively acquire the new knowledge and skills, are the keys to enhancing employment of aged people.

It is also effective for office workers to obtain technical skills to protect jobs. Baby-boomers began working amidst a high growth period and spent their younger period experiencing growth and expansion of companies. Accordingly, while they may have experienced various lines of work within a company, they have not had much opportunity to realize their own specialized skills or to actively seek their own careers. But by looking back and analyzing their own experiences, valuable assets acquired through long experience should become evident.

Recently, some corporations are increasing income by adopting worksharing schemes to allow employees to choose various forms of work, or implementing effective employment management measures to bring out the abilities of individual workers ahead of retirement. Analyses of these examples are useful in assessing the possibilities of increasing the capacity of the work force for aged people, as well as for seeking ways to enhance workforce quality and efficiency.

In a society where population is declining, what should be sought is a working environment where everyone can exercise motivation and capability without regard to age or sex. The handling of the 2007 problem will be critical for coping with the aging society, which Japan is to experience for years to come.

(The original Japanese article appeared in the March 28, 2005 issue of Nihon Keizai Shimbun.)