Raising the state pension age disproportionately affects this demographic; is it time for extended employment?
The UK government is currently conducting a review of the state pension age, with a focus on potential automatic increases in line with rising life expectancy. This move comes as several countries, including Denmark and Sweden, have already implemented binding adjustments of pension benefits based on life expectancy.
At present, the state pension age in the UK stands at 66 for both men and women. However, this is set to rise in the coming years, with the state pension age due to reach 67 between 2026 and 2027, and 68 by 2044 to 2046.
The government's growth agenda relies heavily on retaining older workers. It is estimated that over £31 billion of output is lost each year from individuals retiring early before the state pension age. This is particularly significant for the Industrial Strategy sectors, as the departure of over 50s from the workforce has a major impact.
Catherine Foot, director of the Standard Life Centre for the Future of Retirement, emphasized the importance of ensuring people nearing state retirement age can remain in work. She highlighted that this is not only essential for many people's retirement incomes but also for the country's economic growth prospects.
A new study by the Institute of Fiscal Studies (IFS) found that women in their late 50s who are out of employment have been particularly hard-hit by the rise in state pension age from 60 to 66 that occurred between 2010 and 2020. For those who were in paid work in their late 50s, their employment rate at ages 60 to 64 jumped by 16 percentage points, as significant numbers delayed their retirement.
However, falls in average income at ages 60 to 64 as a result of the increase in the state pension age were larger for women who were out of employment in their late 50s than for those who were still in paid work in their late 50s. This suggests that those who are already out of employment may struggle to re-enter the workforce in response to reforms.
Raising the state pension age will encourage or force many people who can't afford to retire without the state pension income to work longer. However, it's important to note that a combination of longer lives, rising cost pressures, and economic uncertainty make it essential to ensure workers don't fall out of employment before they reach the state pension age. Good quality, satisfying employment can help build financial resilience for later life.
The IFS also pointed out that state pension age rises led to a big boost in employment but also pushed more people into income poverty. Women out of employment in their late 50s are more likely to have a low income, to be in poor health, or to have a disability.
The state pension is set to increase by just over £560 a year next April, an inflation-beating rise. However, for those who have been hardest hit by the rise in the state pension age, this may not be enough to offset the losses they have experienced.
The state pension age review will assess the "merits" of implementing automatic adjustments to strengthen government finances and manage the long-term sustainability of the state pension. It will also examine the experience of other countries that have already automatically linked payments to life expectancy, including Denmark, which recently raised its retirement age to 70, set to kick in by 2040.
As the review progresses, it will be interesting to see how the UK government approaches this complex issue and what changes, if any, will be made to the state pension age.
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