By Dr Rebecca Benson, Research Fellow, the Policy Institute at King’s
We’re living longer (mostly – more on that later) which is good news, but ageing populations create new policy challenges and exacerbate existing ones. Pensions, health and social care, housing, and employment, among others, are all affected by changing demographics. Addressing these issues entails overcoming many of the usual barriers to change, not least that the benefits or costs of action are unlikely to be realised within an electoral cycle.
One area where policy change has been made is in the age of eligibility for state pension. Like many other high-income countries, the UK has sought to encourage older workers to remain in work by increasing the age at which state pension can be claimed. Previously, women became eligible for the pension at age 60 and men at age 65. The age of eligibility for women is gradually being increased to 65, and then both men’s and women’s pension age will continue to increase to age 67. Analysis has suggested that further increases are likely.
This increase is intended to offset some of the financial costs of ageing populations, by maintaining the tax contributions of workers who delay retirement while lessening the number of people to whom payments must be made. However, realising these savings is unlikely to be straightforward. In 2016, only about 69% of men and 56% of women aged 55 to 64 in the UK were employed, suggesting eligibility for pension alone is not a strong enough incentive to continue working.
The UK is above the OECD average for employment in this age group, but even the highest employment rate for 55- to 64-year-olds is 76.4%, in Sweden. This higher average can partly be explained by comparable employment rates between men and women, whereas in the UK the overall average is lower because of the relatively low employment rate of women in later middle age. But even if the UK were able to reach Swedish levels of employment among this age group, there would still be about 26% not working in the decade before pension eligibility, and this is likely to increase as the pension age rises.
Why is there a relatively low employment rate in the years around pension eligibility? One reason is that people leave work in order to provide care. This informal care provision fills an important gap, given there were an estimated 1.2 million older adults having unmet care needs in 2017. Placing barriers to family members’ ability to provide this care, for example, may reduce the amount paid out in pensions but will increase demand on the already-stretched social care system.
The other obvious reason people stop working as they get older is declining health. The relationship between health and work is complex: many jobs require a minimum level of health to undertake, and some types of jobs can be beneficial for health. But some kinds of work can have negative health effects, whether from the physical demands of the role or the psycho-social effects of effort-reward imbalance. In short, any job is not better than no job, and from a financial perspective, incentivising people to remain in jobs which adversely affect their health may result in medical and care costs that offset any savings achieved through delaying pension payments.
In the short term, there are some barriers to this policy change affecting retirement decision making. The first of these is knowledge; a recent study found 36% of the population – and 30% of 55- to 64-year-olds – will receive the state pension later than they expect. The second is that these decisions are closely linked to decisions made much earlier in life. For example, women’s career trajectories are strongly affected by their decisions about having and caring for children relatively early in their working lives, potentially decades before they would be affected by changes in pension age.
In the longer term these barriers may be less important. However, the longer term allows for many of the social issues we are beginning to see today to radically transform how we think about work, pensions, and retirement. In some areas of the UK, life expectancy is declining. It’s too early to know whether that trend will continue, but declining life expectancy would negate some of the urgency about stretching public pension funds to cover longer retirements. Already, those in lower-status occupations are in receipt of state pensions for significantly less time than those from higher-status occupations.
We’re also seeing changes in work, with young people increasingly likely to be self-employed or working in the gig economy. The relationship of older people to work is changing too, with ‘unretirement’ becoming more common, especially among well-educated and affluent groups. Will a model of financing old age that was developed when the life course was divided into distinct periods of work and post-work continue to make sense as the way we work changes?
The public cost of providing a pension to an ageing population is high, and it is clear that policy is needed to make public pensions sustainable. Increasing the age of eligibility for this pension is an obvious target, but some groups will find this particularly burdensome. Ensuring older adults have adequate financial resources in the face of changing demographics and uncertainties about the future of work will require solutions more creative than simply ‘extending working lives’.