Retirement - a 'process' not an 'event'

by Dr. Ros Altmann

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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  The idea of one retirement age is, in my view, outdated.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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