In light of the pandemic, the IFOA Covid-19 Action Taskforce (ICAT) Social Security Group has been re-examining retirement ages. In particular, whether earlier access to state pension benefits should now be considered despite this being in the opposite direction of travel from government policy in most western economies.
The retirement age tug-of-war
In light of the pandemic, we have been discussing the issue of retirement ages in our IFOA Covid-19 Action Taskforce (ICAT) Social Security Working Party. There are two opposing views on this debate:
- Encouraging later retirement in order to try and control the costs associated with providing retirement benefits to an ageing population.
- Early retirement may provide dignity for older workers leaving the workforce following the pandemic as well as providing employment opportunities for younger workers.
Before the pandemic, in order to control costs with the improvements to life expectancy and declining or stagnating birth rates in many western economies, many OECD countries had increased their effective retirement ages. In the UK the State Pension Age rose to 65 for woman between 2010 and 2018, and then to 66, 67 and 68 for both men and women. State Pension Age is expected to increase further to reflect changing life expectancies.
It has been argued that increasing the retirement age to aid sustainability of pension systems may lead to more youth unemployment. There is, however, no empirical evidence for this claim. A counter argument is that increasing state retirement ages, and policies to enable employment of older workers, are likely to support the employment of both older and younger workers, by retaining experience within the workforce to better equip future generations for work.
Impact of pandemic
Governments may now have to re-assess their retirement policies given the devastating impact of the pandemic on the world economy. Many people have lost their jobs; and new jobs will take time to create. There are also some sectors which may be permanently reduced or lost forever. A significant number of older workers may not be willing or able to adapt to jobs available in the post-pandemic economy.
Given the situation, and the lack of immediate employment opportunities, should governments and employers now consider making early retirement more accessible? And if so, how?
Does the government continue to pay long-term unemployment welfare to older workers with little or no out-of-retirement savings, or should early retirement (in terms of state pension access) be seen as an option? And if so, what age would you allow early retirement? Would early retirement include state benefits, or occupational pension benefits only (which in the UK are already typically available from age 55)?
According to The Urban Institute, the long-term unemployed tend to earn less once they find new jobs. They tend to be in poorer health and have children with worse academic performance than similar workers who avoided unemployment. Communities with a higher share of long-term unemployed workers also tend to have higher rates of crime.
We want to therefore avoid long-term unemployment, but is early retirement part of the solution? Early retirement is very much in the opposite direction of travel from government policy in most western economies but maybe we need to be open to reversing this to try and avoid long-term unemployment, with its adverse consequences on physical and mental health.
Evidence is also starting to indicate that labour force participation has fallen in a number of countries, which indicates that more people are out of work are no longer looking for employment – e.g. due to lack of opportunities, childcare issues, or due to individuals taking early retirement. The stresses of pandemic job security may also be a driver, especially if individuals have been furloughed or laid off - it might be a relief to not work for a period. Some of these workers may have savings to fall back on, or are prepared to accept a lower level of income going forwards. Others are going to be struggling.
Older workers may find job hunting and possible relocation more challenging compared to younger workers. They may also be less prepared to re-enter training or to upskill. This may have been an issue before the pandemic with increased automation in the workplace.
A number of companies, such as Delta Air Lines and Southwest Airlines, have therefore invested significantly in providing early retirement to employees as a method of managing the workforce.
If individuals unexpectedly have to retire early, they may not have adequate savings to support the longer retirement period. Perhaps we should be more open to providing state pension benefits earlier if certain criteria are met although I appreciate this is very difficult to do in practice and expensive to administer, there may be perceived ‘fairness’ and age discrimination issues.
Government finances are going to be stretched post-pandemic; however we should consider the costs of providing early retirement benefits versus the costs of providing long-term unemployment benefits.
The ICAT Social Security group consists of Chris Sutton, Peter Tompkins, Laura Llewellyn-Jones, Tawanda Chituku, Stephen Moncrief and Alan Newton.
Related article: Social Security systems act as a window on future COVID-19 related imbalances.
For more information on ICAT and actuarial resources on Covid-19, please visit the IFoA Pandemics Hub.