A wage peak system is a policy extending the retirement age or rehiring people after retirement at a reduced salary.

pro

There are many systems for working people, and there is one system which is used in companies. It is a wage peak system. After a wage peak system was passed into law, it was introduced into public enterprises. This issue got more attention because Samsung will start a wage peak system this year. According to the Ministry of Employment and Labor, a wage peak system is a policy extending the retirement age or rehiring people after retirement at a reduced salary. It is divided into three: increasing the retirement age and decreasing salary, rehiring retired people at a decreased salary, and rehiring retired employers but with decreased working hours. There are lots of positive effects of a wage peak system.

First of all, it can reduce the unemployment rate of people who are over the retirement age. According to the Center for Strategic and International Studies (CSIS), Korea’s population of people who are over the retirement age has increased rapidly, and it is expected that it will pass developed countries in 2030. The age of retirement, generally 55 years old, is too early. Because of the age of retirement, a lot of retired people spend their remaining years with no occupation. However, a wage peak system solves this problem. They can work longer, and this leads to an increase in productivity. Retirement is not a problem only for retired people. Young people are paying attention to this issue, too. According to Korea Recruit, 72.4% of workers would choose a wage peak system. They answered that the biggest merit of a wage peak system (67%) is the promise of employment in old age and less worrying about forced retirement.

Second, long-term employees’ experience can help companies. Long-term employees have lots of know-how related to their work because they have worked for a long time. Also, they know how to handle their work efficiently. Therefore, they can help new employees. If there is no wage peak system and long-term employees retire, high-quality human resources will be lost. Then, more money and time will be spent in developing new employees’ job-related skills.

A wage peak system has many positive effects such as getting rid of concern about life after retirement by extending the retirement age. Also, a wage peak system provides profit for companies because they can maintain high-quality human resources much longer. Therefore, a wage peak system is needed.




con

As Korea society is aging, there are lots of people who have a hard time after retirement. The government passed a law extending the retirement age to 60 to settle this issue, and this law will be mandated from 2016. Through the law, companies have begun to introduce a wage peak system to reduce labor costs. Samsung Electronics decided to introduce a wage peak system on February 27, and other companies are expected to introduce this system. However, it is still too early to introduce a wage peak system.

First, workers’ severance pay will be significantly reduced. Severance pay is based on the average wages from the three months preceding retirement. When workers retire after the introduction of a wage peak system, their severance pay will be inevitably reduced because employees’ wages are reduced by a wage peak system. A Korean Confederation of Trade Unions official said, “If wages are reduced from a specific point in time, severance pay is also reduced. Korean workers have little social safety net. Therefore, the introduction of a wage peak system will cause poverty in old age.” Korea’s elderly poverty rate of 45.1% is the highest among OECD countries. Thus, labor unions anticipate an increase in poverty with the elderly if severance pay is reduced after the introduction of a wage peak system.

Second, corporate productivity will be lowered. Employees under a wage peak system receive a smaller salary because they cannot receive incentives or bonus payments and may feel alienated from other employees. For example, Kookmin Bank abolished a wage peak system after three years. Most employees who were under the wage peak system undertook simple tasks before retirement, for example, debt collection and complaints. These employees lost their motivation to work and even demoralized other employees. Kookmin Bank announced that productivity per employee was 12.35 million won based on the third quarter in 2010. This was the lowest among commercial banks. A Kookmin Bank official said that this was one side effect of the wage peak system. Like this, a wage peak system can lead to poorer results in terms of a company’s productivity because of falling concentration and loyalty to the organization.

A wage peak system does not have solutions for reduced wages and severance pay and for the decline of employees’ productivity. Therefore, the introduction of a wage peak system is too early. Companies should introduce this system only after improving the system through dialogue between labor and management.