Much of the discussion about retirement is framed in a rather gloomy way. For example, one problem is that the period of retirement for many people is getting steadily longer.
A longer period after work does pose challenges for the individual. All other things being equal, someone aiming at a given income for a longer period of time has a limited number of options. They can save more of their income or they can work longer – or they can do both.
One important role for the financial services industry, and for financial advisers in particular, is to encourage people to save responsibly, which may often mean saving more. Government should provide the right incentives to save, should remove disincentives to save – such as excessive means testing, must ensure the regulatory framework generates consumer confidence and ideally would establish an environment in which individuals can plan and advisers are able to advise with confidence.
These issues are at the heart of pension policy and many of them will be addressed in a major report – A New Contract for Retirement – due to be released in late March by the Institute for Public Policy Research.
The option of working longer is less frequently discussed, although the official retirement age for women is already set to increase from 60 to 65 – to align with the age for men – between 2010 and 2020. One of the recommendations in our report will be for an increase in the official retirement age for men and women from 65 to 67 over the decade from 2020 to 2030.
To those who are dismayed at the prospect of being chai-ned to their desks for another two years and to those who feel that adequate saving will take more than an extra two years, it is worth saying that no one can be forced to continue working or saving.
Early retirement will always remain an option but people need to be able to support themselves. If ministers press ahead with legislative changes to rule out blanket mandatory retirement ages, we will become more and more used to choosing the time of our departure from full-time work. The official retirement age may simply become the earliest age at which state retirement pensions and benefits become payable.
There is evidence that the official retirement age affects labour force participation rates. We would expect an increase to drag up employment rates for older workers, helping to achieve a goal that everyone recognises as desirable.
It should be recognised that changing the official retirement age only has the full desired impact if it changes behaviour. The reform would certainly act as a strong signal, raising public awareness of the need for long-term financial planning.
Another key effect would be to make public pensions less expensive. Over the long term, and especially compared with many other European countries, the current UK Government pension settlement is certainly affordable.
Raising the retirement age would thus allow more generous provision of pensions by the state – a politically popular move. Whether the official retirement age is raised or not, there should be more public debate about retirement in the context of increased healthy life expectancy.
It would be a positive development if individuals stopped thinking about retirement as the point where fulltime work ends and full-time leisure begins. Instead, the third part of our lives could be considered a time to reduce our hours of paid work, a time to take on more community and voluntary activities, and generally as a steady process rather than as a one-off event.
Many mature workers express their desire to switch to working part-time, or to take less demanding roles than they have previously fulfilled. It is a challenge both both for employers and the Government to assist this process. One step for the Government would be to adopt the suggestion of the performance and innovation unit that people should be able to take part of their pension while continuing to work part-time for their current employer.
Several countries have planned for or are considering raising the age at which the state pension is paid. The US is raising its official retirement age to 67 by 2027 and this is also the age that Sweden has chosen. It is interesting that these two advanced market economies, with their contrasting social and economic policies, are both implementing changes similar to that being considered in the UK.
As with so many new ideas, raising the official retirement age has quickly gone through the stages of being ridiculed, to being opposed, to being common sense in professional circles. Now it is time to go back to the public and have the debate in the open.
Richard Brooks is a researcher at the Institute of Public Policy Research