As people live longer, saving enough money to support themselves in full retirement is no longer a realistic option
Tory proposals to raise the state pension age to 66 in 2016 have certainly captured the headlines. However, dealing with the problem is not as simple as that.
Millions of older people could soon be in poverty, as smaller numbers of taxpayers have to support a soaring proportion of people over 65 in the next few years. At present pensioners comprise under 20 per cent of the population, but that will rise to more than 25 per cent in the 2020s. There will be more than 16 million pensioners and, according to the European Commission, the relative level of poverty among pensioners in the UK is one of the highest in Europe, worse than in Poland and Romania. One in three of the over-65s in Britain is at risk of poverty.
People are living much longer, and that means longer periods of retirement. In the 1950s average workers spent two thirds of their life in the labour force. Today as people stay at school longer, retire earlier and live longer, only about half their life is spent earning. As life expectancy keeps rising, if we do not change the concept of retirement, people will spend more than half their life out of the workforce.
Just tinkering with the pension age will not solve these problems. Nor is making people work longer likely to generate the expected cost savings, unless it is accompanied by a comprehensive reassessment of income in later life.
Astonishingly, we have only just introduced the last set of state pension reforms — which politicians assured us would sort out our problems until at least 2050. I warned at the time that these “long-term” reforms were not a solution. Now the Conservatives are proposing changes to the new system before it even starts. However, just tweaking parts of the system is rearranging the deckchairs on the Titanic when the whole system is sinking.
The UK state pension is just about the lowest and most complex in the developed world. After a working lifetime of national insurance contributions, our full basic state pension is only about £95 a week.
Increasing it in line with earnings will make precious little difference. Workers may also receive a bit extra from the second state pension, but the means-tested, non-contributory pension credit pays £130 a week to anyone over 60 on a low income. Nearly half of pensioners are eligible for these means-tested benefits. Those who have not bothered to save and do not keep working may be paid more by the State than those who paid contributions for decades.
And if the pension age rises to 66, but 65-year-olds cannot find work, they will end up on pension credit, which could actually pay more than the state pension, thus negating the estimated savings of the change.
In reality most people will never be able to save enough, during a normal working lifetime, to provide a decent pension for retirement at 60 or 65. Stock market returns cannot be relied on and the rising costs of annuities will further erode pension values. Working for 40 years to save enough to provide a decent income for another 30 years is unaffordable.
Changing the pension age will not deal with these fundamental problems. Just making people wait a year for their pension is an old-fashioned way of thinking. Inevitably, they will see it as being forced to work longer.
However, with a more visionary approach, the idea of a longer working life could be a positive, not a negative, message.
The arbitrary age of 65 or 66 should not be a “target” date for people to stop work altogether. Part-time work for those over that age must be encouraged. We live longer, healthier lives. Most people are not “old” at 60 or 65, so why throw them out of the labour force at that age, especially as most jobs no longer entail heavy manual labour?
Retirement should be a process, not an event. There is a whole new phase of life waiting to be enjoyed, perhaps working two or three days a week and having four or five days free, with more money to spend in that extra leisure time; a phase of life where workers cut down but do not stop altogether.
These would be “bonus years” that previous generations could not enjoy, because they did not live long enough or were not in such good health. The concept of part-time work in later life is a social revolution that could benefit us all. Just as we have achieved this for working mothers in the past 30 years, I am convinced we will do the same for older people.
Employer attitudes must change and they must be required to make jobs available for older workers. The same kind of legal protections should be provided as for working mothers, with the right to part-time, flexible working. At the moment, age discrimination legislation ends at age 65. This must change.
The 70-year-olds of the future could be job-sharing or mentoring younger staff, or may have retrained to do something that they always wanted to do. Just tweaking the pension system to fit fiscal projections will not deal with the problems of an ageing population.
Planning for “bonus years” and rethinking retirement, with a simpler, non means-tested state pension, would be a great leap forward.
Dr Ros Altmann is a governor of the London School of Economics and a former adviser to the Treasury and No 10 on pensions policy
(Ros Altmann, The Times) http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article6863731.ece
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