Masako Wakamiya, 83, has become a poster child of sorts for a socially involved and economically active senior in Japan’s “super aging” society. Her seemingly unlimited ability to acquire new knowledge and skills long after her corporate life is most admirable. After her retirement from a bank at 60, Wakamiya learned to code and is now one of the oldest app developers in the world. She has met Apple CEO Tim Cook, spoke at the United Nations and was featured in numerous media. She is a celebrity and role model in Japan, where many people can realistically expect to live to 100 years old.

If we could all age as gracefully and usefully as Wakamiya, it would be a bit easier to paint a rosy future for Japan, where approximately 40 percent of the population will be 65 or older by 2050. Currently, Japan has the highest old age dependency ratio among all OECD countries, with a ratio of over 50 persons aged 65 or older for every 100 people between the ages of 20 and 64. This ratio is expected to rise to 79 per 100 in 2050. Given this gloomy projection, extending the working lives of the elderly has become a top priority for the government.

This daunting challenge is a critical component in the government’s efforts to curb welfare spending and to secure much needed labor at the same time. Indeed, various policies to encourage senior citizens to work longer have been discussed. Politicians are now looking to lift the age through which firms are required to employ their post-retirement workers from 65 to 70.

Will more people work until the age of 70 and beyond if the legal system changes? Surveys indicate that a large number of people are enthusiastic about working longer in their old age. Many also express concern over their post-retirement financial security. Public pensions are, in principle, paid at the age of 65, but the government is now going to give people the option to start receiving pension benefits after the age of 70, with financial incentives given to those who choose to become pensioners later in life. Given this, it is reasonable to assume more Japanese will be working until 70 or older in coming years.

The problem, however, is that many of these senior workers are not necessarily making the best use of their expertise and skills. Most companies in Japan maintain a system of mandatory retirement at the age of 60. Employees are given the option to continue working until 65 as irregular workers when they turn 60. If they choose to stay at the same firm, they retire as regular workers and are rehired under an irregular status with downgraded responsibilities and compensation.

The mandatory retirement is systematic and applies to all employees, irrespective of their professional competency. It is not difficult to imagine how demoralizing it is for longtime employees to continue to show up at their familiar workplace with less responsibilities and skimpier paychecks. This explains why the retention rate of workers over 60 at the same firm remains low.

If companies are to take advantage of the knowledge and skills of their long-term employees, they need to assess individual abilities and match them with appropriate positions. A one-size-fit-all approach would not be sufficient because the performance and capability gap among employees can be significant even within the same age group. In other words, when the age factor has been removed from the checklist for human resource decisions, companies can truly optimize their talent pool, including older employees. It may sound ironic, but shifting from seniority- to merit-based compensation and promotion system would provide better opportunities for older workers, especially for strong performers.

One main reason companies stick to a mandatory retirement system is a relatively restrictive interpretation by courts on topics such as unfair and collective dismissals of regular workers. Because it is very difficult for employers to dismiss regular workers on economic grounds, they rely on the mandatory retirement system to adjust the workforce.

Seniority-based compensation, combined with lifetime employment, often makes it expensive for companies to maintain senior employees on their payroll. As wages increase with employees’ tenure, regardless of their individual productivity levels, the personnel cost for companies can only be controlled through a mandatory retirement system. Employment protection rules, which make it difficult for companies to dismiss employees, actually limit opportunities for senior skilled workers in the long run.

Abolishing the retirement age system should lead to higher mobility in the labor market and give both employees and employers the ability to match skill demand and supply more effectively. Computer programmers are in demand in almost all industries today, for example. It shouldn’t matter if an app developer is 83 or 23 as long as their output meets the market demand. More mobility in the labor market should also incentivize workers to re-skill themselves and respond to emerging needs within the growth segments of the economy.

Having said that, shifting from a rigid lifetime employment system to a new regime of eliminating mandatory retirement altogether would give this country a bit of shock. Instead, a gradual extension of the mandatory retirement age could reduce the risk of losing older workers when reclassifying them as nonregular workers. Implementation of “work style reform” is also important to promote the longevity of people’s professional lives. In particular, implementation of the equal-pay-for-equal-work principle is crucial.

Japan needs more people like Wakamiya. It is time to break the spell of aging.

Yumiko Murakami is head of the OECD Tokyo Centre, where she engages in policy discussions between the OECD and governments, businesses and academia in Japan and Asia, covering a wide range of economic policy issues. The views and opinions expressed in this article are those of the author and do not reflect the official view of the OECD.

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