Ticking Time Bomb

The Institute for Economic Affairs (IEA) number one recommendation in a report issued today says the government should accelerate the introduction of a later retirement age, which would have a significant impact on the recruitment market in future years. It also suggests a compulsory private pension scheme to replace the state pension.

Employment rates amongst older-middle-aged people have fallen significantly. Between 1968 and the end of the 1990s, employment rates for men aged 60-64 slumped from around 80% to 50%.

Despite a recent recovery in employment rates to 60% for males aged 60-64, in the last generation, there has been a marked decline in employment of older-middle-aged people. The result is that, under current policies, state pension provision and other benefits paid to those who retire before state pension age represent a ticking time bomb for the public purse.

State pension expenditure is expected to rise by 2.4 percentage points of GDP between 2012 and 2062 – an increase of 42% as a proportion of national income.

Ten policies to ease the state pension time bomb

  • Accelerate the rise in retirement age. From November 2018, the state pension age for men and women should increase by two months every quarter. This would see the age increase to 68 by January 2023.
  • Link retirement with life expectancy. From January 2023, the state pension age should be tied to life expectancy.
  • Exempt older workers from employment protection legislation. Employment regulation hurts the elderly overall, especially those currently unemployed. Removing regulations would incentivise employers to take on older workers and also enable greater labour mobility and flexible working patterns.
  • Introduce a pilot scheme to exempt older workers from age discrimination laws. If rigorously enforced, there is some evidence to show age discrimination laws make companies more reluctant to hire older workers. A large-scale pilot exempting some firms should be trialled.
  • Encourage individuals to save for their own retirement. With greater private pension provision, older workers would have to bear the costs of early retirement themselves.
  • Consider the introduction of compulsory private pension provision to replace the state pension. In Australia, pressure on the public finances has been successfully alleviated through a system of compulsory private pension provision. These reforms saw employers putting aside at least 9% of employees’ pre-tax earnings into a personal fund. Under such arrangements, individuals who choose to retire later benefit financially.
  • Reform disability insurance schemes. Often used as de-facto early retirement schemes, the government should tighten eligibility requirements. The overall incentive framework must be reformed to encourage labour force participation where possible.
  • Reform unemployment benefit schemes. These can also be used as an early exit route from the labour market. Evidence shows that countries with more generous unemployment insurance have an increased likelihood of the unemployed entering retirement.
  • Cut labour taxes. The government should extend National Insurance exemptions, reducing contributions as soon as a full state pension has been accrued.
  • Government should refuse to grant stronger union prerogatives over wage bargaining. Evidence suggests that higher levels of union involvement in wage setting put older workers at a disadvantage compared to prime-aged workers.

The full report “Income from work – the fourth pillar of Income provision in old age” can be downloaded here

Mike Sandiford
Head of Partnerships
0207 193 9931

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