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Retirement
– a ‘process' not an ‘event' (All material on this page is subject to copyright and must not be reproduced without the author's permission.) We
all know that pension policy is under the microscope at the moment.
There is much talk of ‘raising the retirement age' as a way to
solve the problem of increasingly inadequate, yet costlier State and
private pensions. If we are to provide a sustainable solution,
we need to consider the issue from a broader perspective. The
idea of one retirement age is, in my view, outdated. We need
to move away from the notion of going straight from full-time work,
to full time ‘non-work'. Social attitudes – of both
employers and employees –will need to focus on the benefits of
gradual and phased withdrawal from the labour force.
Retirement should become a ‘process', not an ‘event'. Current
trends are of great concern. The decline in birth rates,
longer periods in full-time education and earlier retirement mean
that the supply of labour will decrease significantly. In the
next 20-30 years, the demographics suggest that there is likely to
be a shortage of labour. These trends will ultimately mean
that long run economic growth is at risk. If there is
insufficient labour, the economy is unlikely to be able to achieve
reasonable economic growth and UK economic performance will decline.
Quite simply, people are living much longer than before. If
they continue to retire at the same age as now, without increased
private savings, costs of supporting the older members of society
will rise. The outcome will be that more and more older people
will be in poverty and overall economic welfare will be lower.
This is a waste of social and human resources and just raising the
pension age will not solve this problem. People need to
contribute more and for longer to their pensions and we also need a
more flexible policy which can account for individual differences,
encouraging people to stay at work. This is in both their own
and society's best interest. Employers
are starting to recognise the benefits of an ‘age diverse'
workforce, retaining experienced, more reliable older workers for
longer, better matching customer age profiles, reducing costs of
hiring and training new workers. At the same time, workers are
starting to focus on the possible benefits of staying at work for
longer. They value the extra income work can bring, higher
eventual pensions when stopping work later, feelings of usefulness,
the company of colleagues. But people often do not want to, or
may not be able to continue working full time at the same high
stress levels as when they were in their 40's or 50's.
They need to start working less, gradually cutting down working
hours over a period of years, job sharing, mentoring, perhaps also
retraining to perform different functions. Policy
changes are urgently required to encourage this. Government
has started to seriously consider this issue, New Deal 50+ is a
great start, but much more needs to be done. Rather than just
raising the retirement age from one figure to another, it would be
better to abandon the notion of a particular retirement age
altogether. The current state pension age was set in the
middle of the last century and is based on mortality assumptions
which are seriously outdated. Longevity and health status have
improved significantly, but pension and retirement policy have not
kept up with this. We should be able to allow for individual
differences in our more modern, diverse society. There have
been significant positive developments in medical science and work
conditions, but employment policy has not moved in step.
We
are now in a position to introduce new models of labour force
activity. When the retirement age concept was introduced, the
general expectation was that everyone would have to work until they
were too old to do so and then they would need to be supported for
the last short period of their lives. There was never any idea
that people would be retired for 30 or 40 years! Society
should now put in place safety nets and improved working conditions,
so that people can work more flexibly, to suit their needs, still
contributing to the economy and their own financial welfare in a
meaningful way. We have been able to develop new labour
participation models for working mothers, to allow them to have
periods out of the labour force or working less than full time.
So why can we not devise similar models for people at older ages?
Older
workers need improved job opportunities to be better able to choose
how much they want to work,or how much they can afford not to work
if they prefer more leisure. To achieve this, raising the retirement
age would not be the most useful policy change. It would be
better to introduce a ‘flexible band' or ‘target range' of
ages for withdrawal from the labour market. Allow people to
slowly cut down the amount they work. Why should we have one
retirement age? Surely the aim of policy should be to allow
people to work for as long as they are able to, as long as they need
to and as long as they want to. Achieving
a flexible period of pre-retirement working, with gradually reducing
labour force participation, requires flexibility in pension
withdrawal. We need proper incentives to delay drawing State
pension by increasing payments at older ages. People should be
able to choose to take a much higher pension later and be rewarded
for contributing to economic activity for longer. Obviously,
there will still need to be a safety net for those who need to be
looked after, but this should be the exception, rather than the
rule. New
policies will be needed to bring such a social change about.
Government has expressed its willingness to address this issue and
there is much that needs to be done. There are currently too
many impediments, preventing people from continuing at work when
they are older. Currently, State pension increases for delayed
retirement are insufficient to provide an incentive to delay drawing
the pension. Furthermore, Inland Revenue rules prevent people
drawing a pension and staying at work with the same employer.
Given the difficulty of changing jobs at older ages, this is a major
problem and these rules need to be changed. Final salary DB
pension schemes are not suited to the concept of gradual retirement
and employment protection legislation does not apply to older
workers. The introduction of age discrimination legislation
will help. Ending the ease with which people can take early
retirement benefits and banning mandatory retirement ages could also
be considered. We
still have time to re-educate social attitudes to get better value
from the labour force of the future. The demographic position
will deteriorate again from 2020 and we need to put policies in
place for that now. If we don't do this, the implications
for long term growth are serious. Of course, for a financial
adviser, this would offer a potentially interesting new market for
financial planning advice. People will need help to understand
how best to achieve their desired standard of living when combining
earned income with pension/savings income. Retirement should
be thought of as a journey, rather than a destination, with
flexibility and choice for people to continue working for much
longer and drawing part of their pension if they need to. A
‘one size fits all' retirement age policy does not sit well in a
modern society. It is time for a change!
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