Income from Work – The Fourth Pillar of Income Provision in Old Age

Government reforms to state pension age must go further and faster

Summary:

·      Despite substantial improvements in life expectancy, the employment rate among men aged 55-59 decreased from over 90 per cent to less than 70 per cent between 1968 and the end of the 1990s. The figures for men aged 60-64 and men aged 65-69 slumped from around 80 per cent to 50 per cent and 30 per cent to about 15 per cent respectively.

·      Recently, there has been some reversal of the trend of declining employment at older ages. For example, the employment rate for males aged 55-59 was about 80 per cent in 2008.

·      Not only do recent improvements not reverse the earlier decline; employment rates among the elderly should have increased since the 1960s to reflect increasing life expectancy and improved health.

·      Many other EU countries have lower labour market participation amongst older workers than the UK. In Italy, for example, only 40 per cent of 55-64 year olds are active in the labour market. In Switzerland, however, employment is around 70 per cent of the workforce in this age group and both the USA and Japan have higher employment rates than the UK.

·      Well-functioning retirement-income systems are desirable to enable people to retire from work. However, it is undesirable to have state welfare systems that encourage early retirement and impose the costs on others. It is also undesirable for labour market regulation to prevent those who would like to remain in employment from doing so

·      A number of reforms are necessary to facilitate beneficial labour market participation at older ages:

o   The current government’s reforms to state pension age are a move in the right direction but they should go further and faster:

§  From November 2018, the state pension age for men and women should be increased by two months every quarter, thus raising state pension age to 68 by January 2023.

§  From January 2023 state pension age should be linked directly to increases in life expectation.

o   The state pension should be replaced by compulsory, private defined-contribution pension arrangements – similar to those introduced by the Australian Labour government in 1992.

§  All income support payments to people of state pension age should become means-tested when the new system is fully operational.

o   State disability insurance schemes are important exit routes from labour markets. Experience of various countries suggests that these are abused. Disability benefits should be reformed to reduce benefits and much more active strategies should be used to assist people receiving disability insurance back into work.

o   Employment protection legislation is likely to be especially damaging to older people and increase early retirement. Older people should be exempted from employment protection legislation not mandated by the EU. One example is to allow no-fault compensated dismissals of workers who are recruited within five years of the state pension age.

o   If they are rigorously enforced, age discrimination laws could raise the risks of employing older people and reduce employment. The government should consider a large-scale pilot in which some firms are exempted entirely from age-discrimination laws, followed by evaluation. Only after evaluation of the impact of age discrimination laws on the employment of older people should it be decided whether to adopt them as national policy.

·      The evidence suggests that a higher degree of union involvement in wage setting ensures that older workers are at a disadvantage compared with prime-aged workers. The government should consequently firmly refuse to grant stronger union prerogatives over wage bargaining.

·      The benefits of increasing participation rates flow both to the individual – in terms of improved health and increased incomes – and to society as a whole as greater employment at older ages will reduce the costs of ageing populations. Furthermore, less government involvement through state pension schemes, disability insurance and employment regulation increases the ability of individuals to determine their own work and retirement patterns.

Featuring on the radio shows such as The Today Programme on Radio 4, Radio Five Live Wake up to Money and LBC; the publication also appeared in BBC NewsThe Daily Telegraph, The Yorkshire Post, The Independent Online, City AM, FT Advisor and several Press Association articles.

To read the press release, click here.

2014, Discussion Paper No 52

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