Re-considering the Year 2007 Problem

Atsushi SEIKE (Professor, Keio University)

There is much debate on the so-called "year 2007 issue" in which the baby boomer generation will be reaching the retirement age of 60, resulting in a shortage of human resources in Japan. To deal with such aging society challenge, drastic transformations instead of mere stopgap measures are called for. The mandatory retirement age needs to be raised to 65, and ultimately should be eliminated entirely. The traditional seniority system should be reconsidered as well.

Year 2007 issue is a man-made and avoidable hazard

The year 2007 is becoming a major topic in discussing the Japanese economy, particularly from the viewpoint of human resources. The oldest of the baby boomers who were born in 1947 will be reaching the age of 60, which is the mandatory retirement age in the most of Japanese companies, and this is causing various concerns such as sudden reduction in the labor force, inability to pass on professional skills, and rapid drop in office space demands.

But these concerns seem strange, considering that this issue was not dealt with earlier when it was obvious for years that it would eventually be coming. There are a couple of points that must be addressed in clarifying what the issue really is.

The first point is the fact that many regard this so-called "year 2007 issue" as an inevitable phenomenon, as if it were something like a natural disaster. It is true that if these baby boomers were to retire en masse at the age of 60, many companies would be severely affected. The number of new hires has been kept low for the past decade due to the recession, and if experienced employees were to leave in unison when the Japanese economy finally seems to be showing signs of recovery a shortage of manpower and loss of accumulated expertise may result.

But it is obviously not the year 2007 that is to be blamed, nor the baby boomers who happen to be reaching the age of 60 at this point. The real cause of the "year 2007 issue" is the traditional corporate system in which employees are required to retire at the age of 60.

If Japanese companies really believe that the 2007 issue is critical, it is a matter of simply raising the mandatory retirement age or eliminating mandatory retirement practice completely. It is absurd to regard such a matter as an "inevitable problem".

The mandatory retirement system is not demanded by some external force uncontrollable by employers. It is a system that corporations themselves have created. As such, any negative consequences it might bring about can be avoided by employers simply modifying that system. If any "year 2007 issues" do occur, they therefore should be considered a man-made calamity caused by corporations unwilling to change their ways.

Some argue that the corporate employment system is not something that can be, or should be changed so easily. This raises the second point. It seems that many view the idea of raising the age limit as a stopgap measure or a minor adjustment to make it through the brief period in which the baby boomers reach the mandatory retirement age. However, the measures required in coping with the current situation are significantly greater than that.

The current proportion of the elderly population - age 65 and over - is at 20%. This ratio is projected to rise to 26% in ten years, and to 29% in another ten years. This figure will mark a particularly rapid hike around 2012 to 2015 when the baby boomers join the elderly population, but the aging of society will not stop there. It is a phase of structural transformation that will continue for years to come, and not some transient event that will disappear when all the baby boomers will have retired.

The "year 2007 issue" may appear to be something like a wave that will soon pass by, but the real aging society is more like the sea level constantly rising through the years. Minor policy adjustments or stopgap measures will only be postponing the consequences. More substantial actions with a long-term vision are needed. It is unrealistic to think that the current social security and employment systems, which were designed in times when the population structure was pyramidal, will still work when this pyramid has been inverted.

Employers selecting workers for employment extension will cause problems

A number of reform measures in the pension program have been put in place thus far. One is to gradually raise the pension eligibility age from 60 to 65. This was indeed a necessary measure, though not drastic enough, considering the exceptionally rapid pace of population aging and Japan having the world's longest average life expectancy.

In response to the change in the pension system, the Law for the Stabilization of Employment of the Aged was amended last year to require companies having a mandatory retirement age under 65 to gradually raise it to 65 - to 62 in 2006, 63 in 2007, 64 in 2010, and 65 in 2013. If this modification is implemented as planned, the first of the baby boomers born in 1947 becoming 60 years old in 2007 will not have to retire that year. The year 2007 issue will therefore be nonexistent.

The amended law requires business owners to choose from the following three options: (1) to raise their mandatory retirement age to 65 according to the above-mentioned schedule, (2) to remove the mandatory retirement system altogether, or (3) to leave the mandatory retirement age as it is but to "continue" employment until age 65. Continued employment is defined in the above law as "a system to continue employing an employee after retirement age if the said employee so wishes". The problem here is that currently companies are allowed to select the employees whose employment will be continued after reaching the retirement age. It may seem to be a minor point for the time being, as the full pension amount will be paid from age 62 until March 2007. But as the pensionable age is raised, eventually to 65, this ill-defined system of "continued employment" will not sit well. Seamless connection of employment to pension is considered standard practice in developed economies.

Even in the United States, which may seem rather flexible in terms of employment rules, mandatory retirement by age is explicitly prohibited by the Age Discrimination in Employment Act. The aging of society in Japan will progress at a much faster rate than in the US. There is a grave urgency to deal with the current barrier and provide opportunities to those who are aged but are capable and still wish to work. The mandatory retirement age should at least be raised to 65, the age when benefits start.

Need for horizontal corporate structures and reconsideration of the seniority system

The ultimate goal is to eliminate the age restriction altogether. An earlier analysis in which myself and my colleague were involved shows that after experiencing retirement due to age, the probability of a male in his early 60s continuing to work decreases by more than 20%. Even if he does continue working, the chances of him being able to work at a job where he can make use of expertise acquired through his professional career are significantly reduced. In a severely aging society, we cannot afford the heavy losses caused by such inefficiency of the mandatory retirement system.

The traditional framework of wages and promotion based on seniority must also be reconsidered. It will become necessary to modify corporate structures to be more horizontal so that the abilities of aged employees are not lost amidst the chain of command. A system to provide skill training at any life-stage would also be an important issue. In fact, many companies have already introduced or contemplated these measures in an effort to keep up with the immensely competitive economy. A personnel framework based on performance and ability in its true sense is beneficial to corporations as well.

For self-employed workers, there is no such thing as a mandatory retirement age. The year 2007 issue is only a problem for employed workers and their employers. It should be noted that the era of corporations began when the baby boom generation reached working age. In the late 1940s, the majority of workers were self-employed or its family workers . Then as the baby boomers finished school and began working in the mid 1960s to early 1970s, the majority of workers are employed by corporations.

The years that followed - through the post-war era of high-speed growth until the burst of the bubble - was the golden age for the Japanese economy. Many baby boomers experienced fulfilling professional careers during that period. Although the recent decade may have brought them threats of layoffs resulting from corporate restructuring, it would not seem an exaggeration to say that, on the whole, they lead a blessed working life.

That very generation is about to obtain an opportunity for extended employment at the end of their careers. The system to provide this opportunity should be one that allows these individuals to exploit their acquired expertise, and to collect appropriate compensation for it. A framework that enables them to take part in business regardless of their age and without consideration to positions or titles would be sufficient. It will not only be effective in preventing the problem that the year 2007 poses, but also in encouraging innovative changes that will lead to creating a society in which workers can enjoy a life-long career. It should have a positive effect in a society where aging will further intensify. Baby boomers will be able to play a substantial role in leading yet another new era: the age of life-long careers.

The year 2007 issue and the discussions it has produced provide a good opportunity to re-acknowledge the need for these changes.

(The original Japanese article appeared in the September 16, 2005 issue of Nihon Keizai Shimbun.)