[OUTLOOK]Retooling retirement pay scheme

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[OUTLOOK]Retooling retirement pay scheme

The government has been pursuing five goals to reform management in our country: a contract wage system instead of the seniority wage system, an end to the progressive retirement pay system, a lower average age-limit, pay based on merit and a performance evaluation system. These five tasks are part of the necessary reform.

However, the government seems to be having difficulty accomplishing these tasks. In fact, there is a basic reason why some of the changes pursued by the government are being rejected, carried out halfheartedly by some managers and left unattended ultimately. The reason is that the reform tasks contain the fallacy of composition, which is committed when a conclusion is drawn about a whole based on the features of its constituents when no justification is provided for the inference.

Let's take a look at a few examples of the contradictions found in the five goals of management reform. Everyone knows that wages based on results is a more efficient pay system than paying by seniority, both in theory and practice. Even the Japanese are abandoning the seniority wage system. So why is the government having a hard time implementing a better and more efficient system? The reason is that the government is forcing it on even those who do not fall within the new parameters. A research fellow at a government institute could have his or her achievement evaluated according to the quantity and quality of his research. However, there would be no means to evaluate the achievement of, for example, an accounting clerk. That is why businesses in private industry pay by result only those employees with heavy responsibilities.

If there were a strict achievement evaluation system, there would be no need for retirement age or contracts. A research fellow who receives 80 million won ($60,000) during her highly productive 40s and 50s could be "worth" 30 million won in her 60s if she is evaluated strictly according to her results. Forcing this research fellow to retire would go against the productive welfare policy President Kim Dae-jung is emphasizing and the essence of the pay by the result system. On the other hand, 40 would not be too early an age to leave a job if 80 million won were not enough. Therefore, there should be no retirement age or contracts in certain fields or profession.

Certain professions do require a retirement age because it is difficult to apply the payment by the result system to them, according to the efficiency wage theory. However, these professions do not need a contract wage system. Employees who fail to do their duty beyond the permitted limit could be discharged according to office regulations.

Next, let's consider the retirement pay system. In the case of research institutes that had been government-supported in the past, the progressive rates of retirement pay vary and there are many institutes that are unable to make the lump-sum payments. If the progressive retirement pay system is a financial burden on the public, it should indeed be changed to a flat rate. However, there is no need to force the institutes to settle retirement pay in a lump sum. Many institutes are going through a hard time because employees are demanding interest on the principal. It is a rightful demand on the employees' part but for the research institutes that do not have the money, it is a double burden to settle retirement pay and pay interest.

For example, let's say that an employee who has been working for 15 years received 45 months of retirement allowance under the old system. Under the new system of applying a flat rate while recognizing the employee's rights under the former system, supposing the employee retired 15 years later, he or she would receive retirement pay for 60 (45+15) months. If we calculate the allowance based on the average wage of the last three months of employment, we'd have a deal that no one would complain of. Having discussed this once with the chairman of the Korea Labor Institute, we agreed that even the labor union would accept this proposal. So we formally requested a revision of the retirement pay system to the then Prime Minister Kim Jong-pil but the request was turned down two months later. We then tried to explain the proposal to the minister of planning and budget but all we got in return was the answer that it was beyond his powers to accept our proposal.

As President Kim Dae-jung said, the five tasks are necessary tasks. The problem is in indiscriminate application. This is like forcing everyone to take Nydrazid because the majority of the people were found to be tuberculosis patients. It might be too late to revoke the retirement pay system but the wage system, the contract system and the retirement age system must be readjusted.


The writer is the chairman of the Korea Council of Economic and Social Research Institutes.

by Lim Jong-chul

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