The pensions crisis and longer life expectancy are forcing policy makers and employers throughout the world to rethink retirement. Policy makers in Britain and other industrialized countries over the next 20 years must assume that people will need to work until they are older. Will retirement as we know it be postponed for a few years? Or will retirement be reshaped, to become less age-related and more fulfilling?
In the recent study Reshaping Retirement, Britain's Tomorrow Project addressed a wide range of topics about the future of people's lives in Britain over the next two decades. The study focused not just on particular drivers of change, such as demographic, economic, and social developments, but also on issues that will have a decisive impact on retirement in the next two decades, such as what will happen to the labor market for older people, to government pensions, and to lifetime savings for retirement.
The key issue for retirement is how to square the triangle of longer life expectancy, adequate retirement incomes, and younger workers' desire to increase their current living standards. Our starting point is that people will resolve this conundrum by working till they are older. The recent reversal of the trend toward early retirement will continue, and growing numbers will work beyond the state pension age.
As this happens, three questions will have to be tackled. How will the transition out of employment be managed? Given that Britain's labor market is likely to remain highly polarized in both skills and income, will the state pension system prevent those at the lower earnings level from slipping into old age poverty? What will be done to encourage people to increase their long-term savings?
Linking these issues is an over-arching theme: How will old age be experienced in the future? Will it remain much as it is now, but just start at an older age? Or will retirement be reshaped so that many more older people mix part-time work with extended leisure, and have higher incomes with which to enjoy their old age, bringing about a much more positive view in society of the aging process?
UP FOR GRABS: RETIREMENT ON THE AGENDA
Retirement is a relatively modern concept. Until recently, there has been a trend toward longer retirement (i.e., leaving the workforce at younger ages), but longer retirements are now being questioned because lower fertility rates will reduce the size of the working population, making it harder to fund government pensions and other benefits for older people. Later retirement is an obvious part of the solution. People are working for fewer years but retiring for longer periods, which is financially untenable; again, later retirement is an obvious answer.
Tackling poverty among older people has become a political priority, but the current solution--means testing--is unpopular. Later retirement in return for a higher state pension for all is the most realistic alternative. Many people will not have saved enough for their retirement if it lasts for as long as it does now; they may have to postpone retirement instead. The government is starting to make it easier for people to stay on at work by encouraging phased retirement and introducing (from 2006) a ban on age discrimination.
We also have an opportunity to transform how we think about retirement and to improve the quality of life for older people. Instead of personal life being divided up on the basis of age, many people are making transitions between work and learning or leisure at many different ages.
A key difference is that individuals have greater choice over these transitions. Traditional retirement might be replaced by greatly expanded choice and by a dramatic shift in how old age is viewed--as a period of human flourishing before a final stage of dependency.
FETTERED OR FREED? WORK IN LATER LIFE
The economic pressure on workers to retire later will mount, but it remains unclear how employers will respond. One possibility is that they will simply postpone workers' eligibility for retirement, forcing older people to work till they drop. Alternatively, they might introduce more flexible forms of employment, tailor-made to the needs of older workers.
Change will not be easy. Today's concept of retirement is deeply entrenched and will not transform overnight. Many people still see retirement as both a reward for hard work and a right to an extended period of leisure. This view is reinforced by the experience of many older workers, who often find jobs stressful and exhausting--an experience that is likely to persist.
Encouraging more-flexible employment, with work lasting till later in life, may be seen as chipping away the right to retirement and damaging to older people's health--an outcome strongly to be resisted. At the same time, age discrimination against older workers by employers could further entrench current patterns of employment by older workers. However, employers will also have to respond to several pressures driving change in the labor market.
Legislation is due in the United Kingdom by 2006 for equal treatment in employment on grounds of age, including the likelihood that compulsory retirement ages (at least up to age 70) will be outlawed. The form of the legislation and the manner of its implementation will help to determine whether retirement will be postponed or reshaped. Pressure may build within the European Union for further legislation to encourage employment by older workers.
Skill shortages, which loom in many U.K. sectors, may be a second spur to a different view of retirement, as parts of the economy become more labor intensive rather than less, technology slices away fewer jobs than expected, the demand for skills rises, the supply of young people entering the workforce begins to tail off, and skill mismatches persist. Employers may respond by investing in labor-saving equipment or by recruiting more immigrant workers, but the recruitment of older workers will be their main strategy. How well will employers respond to older workers' needs?
The aspirations of older workers will be important. They will be influenced by the continued expansion of choice (not only for the better-off, but also for those on lower incomes as living standards rise), by caring commitments to relatives, and by the likelihood that older workers will want employment that is less demanding but still worthwhile.
Commercial constraints may make it difficult to create high-quality flexible employment. These will include the size and location of the business, increasing consumer demands, and heavy competitive pressures on costs. Attracting older workers will either be seen as costly and difficult or as vital for competing in tighter labor markets.
TWO SCENARIOS FOR WORKERS FACING RETIREMENT
1. Retirement Postponed. In this scenario, employers respond with "more of the same" over the next 20 years. They meet the growing economic need for people to work into their late 60s by effectively postponing retirement rather than reshaping it. Older workers acquiesce, despite their health concerns, because they need the money.
The public retains its deep-seated attachment to retirement as a right. Age discrimination at work remains deeply entrenched. Most employers remain cautious and unimaginative. Older workers continue working full time in good-quality jobs, if they have them, or trading down to part-time, more marginal employment, which narrows the opportunities for lower-paid workers. Retirement is still broadly age-related, though at a later age, and the routes into it remain inflexible.
2. Retirement Reshaped. In this scenario, retirement is not postponed but transformed, so that it is far less age-related. Routes out of work are more flexible--driven by a generation of older workers who demand more flexibility in retirement so that they can continue work but without feeling too stressed and worn out. Skill shortages have become so acute that employers are clamoring for older workers. Employers respond by creating more flexible patterns of work.
By 2025, the traditional concept of retirement has begun to change. Retirement is becoming less agerelated, and the pathways out of employment are more varied. Although a substantial proportion of people still leave work in their late 60s, a growing minority continue working into their early 70s--and some even later.
PATCHING UP OR LASTING REFORM?
Britain's government pension system makes a statement about the nature of retirement. It gives younger people a rough idea of when they can expect to retire, and by being strongly age-related it props up a traditional view of retirement. But the present national pension system is under challenge from many quarters. It is criticized for being too complex, for containing disincentives to save, for failing to address poverty adequately, for being ill-attuned to longer life expectancy, and for being costly to the taxpayer. There is widespread agreement that the system will have to be overhauled at some stage.
Yet there are strong political constraints in the way. These include the long-term costs of improving state pensions when set against other demands on the public purse, fears that the benefits of improvement would go to those who need it least, opposition on health grounds to requiring older people to work longer in return for pension reform, and a lack of consensus over the desired nature of reform.
TWO SCENARIOS FOR THE STATE PENSION
1. More of the Same. In this scenario, the British government tries to make the current system work. Elements of the state pension system are improved and indexed to earnings. These steps lift many pensioners off means-tested benefits.
Government meets the additional costs from savings elsewhere and by phasing in an increase in the state pension age to 67, starting in the early 2030s.
Lack of consensus drives government to a minimalist approach, designed to keep intact as much of the present system as possible. No additional steps are taken to make state pensions more flexible as a further encouragement to phased retirement.
2. A Flexible State Pension. This scenario is more radical, though it is presented as the further evolution of the current plans.
A new "Flexible State Pension" is phased in from 2030 and indexed to earnings. It is paid to everyone, irrespective of contribution record, on a residency basis and at a flat rate, set just above the poverty line. Eventually, when all pensioners are covered, the Flexible Pension makes means-tested benefits for this age group largely redundant.
Individuals have increased choice over when they start to receive their Flexible Pension. They can take it any time between ages 60 and 80. The value of the pension is adjusted downward if taken before age 70 and upward if taken later. Those who settle for a reduced pension require an annuity (or equivalent), which will guarantee that their retirement income, including the state pension, remains at the level of the Flexible Pension or higher.
The substantial net costs of the Flexible Pension are met by raising the pension age to 70, phased in over a 10-year period starting in the mid-2030s. People whose lifetime earnings average out at close to the poverty line receive a slightly higher pension.
The age at which the full Flexible Pension becomes payable is adjusted automatically to reflect changes in life expectancy, with those affected notified well in advance of the date at which the full pension becomes payable.
The new Flexible State Pension supports the reshaping of retirement. It further erodes the notion that older people enter a stage of life that is strongly age determined. It embodies the principles of choice and flexibility. It lifts the incomes of the poor, helping them have a more fulfilled old age.
WITH OR AGAINST THE GRAIN? THE FUTURE OF LIFETIME SAVINGS
The government hopes that there will be a strong shift to saving for retirement through an occupational or personal pension scheme. But this seems unlikely under present arrangements.
Among the reasons many workers will remain reluctant to save is that a good number are still too poor to do so. Those on middle to higher incomes who can afford to save for retirement may not save enough; many are not doing so now.
In the future, savings by middle earners will be curtailed by breaks in full-time employment (for example, to look after children), by additional financial commitments (notably paying more for higher education and other government services), by the costs for some of family breakdown (living on your own is a lot more expensive than with another person), by the strong allure of day-to-day consumption, and by longer life expectancy, which makes it harder for young people to imagine their old age and plan for it.
Defined contribution schemes will be unattractive to many people and will gradually wither away. Mistrust is widespread following a succession of scandals and recent collapses in the financial services industry, and they are seen as too costly and risky for employers. Equity-based pensions involve considerable risks for the individual, even if investments are moved into bonds as retirement approaches. Also, the huge range of pension products, complicated charging structures, and complex tax treatments leave consumers confused.
Alternatives to pensions may become more attractive, such as equity release schemes through which people raise income on their homes (called reverse mortgages in the United States), and inheritance.
TWO SCENARIOS FOR LIFETIME SAVINGS
1. Compulsion Plus. In this scenario, employers are obliged to contribute a minimum of 5% of each worker's earnings to his or her pension. To encourage workers to save more, employers are required to match the contributions of individuals up to a total of 9%. So if you put 5%-9% of your salary into a pension, your employers would have to match it.
Despite this new incentive, workers remain reluctant to increase their savings substantially. So in 2011, as part of the reform of state pensions, compulsion is extended to individuals (and retained for employers). The state pension age is raised to 67. Private pensions follow suit, giving individuals more time to save.
Compulsion removes the need for tax relief on contributions to private pensions, which is phased out. The abolition of tax relief funds a substantial cut in income tax, making compulsion politically acceptable. Compulsion rather than choice becomes a key feature of the pensions regime.
2. Lifelong Savings Account. This scenario adopts a more flexible approach to lifetime savings--a different way of thinking about savings altogether. The Lifelong Savings Account bundles together various current savings schemes that attract government support.
This new approach to savings is designed around the life cycle rather than around retirement alone, as currently with pensions. It encourages people to travel through life with a Lifelong Savings Account, into which they put contributions when they can and from which they can make withdrawals to purchase three types of assets: property, work-related learning that will push up their income, or a pension. These purchases attract government financial support up to a ceiling, replacing the support that is given to other current forms of savings. They also attract (compulsory) employer support, again replacing employer contributions to pensions.
The Lifelong Savings Account is kick-started with a much-enhanced "baby bond," financed by receipts from inheritance tax. An annual savings forecast is a further feature.
To qualify for matching contributions, the Lifelong Savings Account is held in a designated bank or building society account, but only with banks and building societies that offer financial advice independent of the sale of financial products.
The scenario responds to reservations about a one-size-fits-all approach to savings. It works with rather than against the short-termism of consumer behavior, it encourages savers to spread risks, and it enshrines the values of choice and flexibility needed for the reshaping of retirement.
TWO FINAL SCENARIOS
We can now pull together the previous sets of scenarios into two final scenarios that provide alternative maps for policies on retirement, the state pension, and savings for old age.
1. Putting It Off. Retirement remains much as we know it today, but it starts later. The beginning of retirement remains age-related, but the age is merely postponed. The financial preparation for retirement is squeezed into a one-size-fits-all straitjacket, which ignores the fluidity and diversity of many people's experiences. This inflexibility leads to inadequate incomes for many people and jeopardizes their ability to lead healthy and fulfilling lives in old age.
Employers are reluctant to devote management time and other resources to creating flexible work for older people. A relatively tepid approach to pension reform reinforces existing views of retirement. Inflexible savings are still the road to inflexible retirement.
2. Liquid Lives. This scenario looks very different. Its foundations are laid during the first quarter of the century, although its main features are not fully apparent till some 25 years later.
Retirement is no longer a distinct phase of life. People can mix and match work and more-extended leisure, with more numerous routes out of full-time employment. Indeed, the distinction between working life and retirement becomes so blurred for many people that eventually the notion of retirement itself comes into question. The financial preparation for retirement is released from its traditional straitjacket. Individuals have more savings options, backed by state and employer financial support. They can tread a more flexible financial path to a more flexible old age.
The need to encourage flexible employment becomes a policy priority. The Flexible Pension cuts pensioner poverty, enabling those on low incomes to enjoy a somewhat more fulfilling old age. Lifelong Savings Accounts embody the values of choice and flexibility to reshape life-time savings, so that people are more willing to save, can acquire more assets, and are able to use these assets to support their old age.
THE PREFERRED FUTURE FOR RETIREMENT
The Liquid Lives scenario would reduce the dominant role of age in retirement arrangements. It would offer older people more choice and flexibility and more opportunities for fulfillment and self-improvement. It would transform the experience of old age and have a "ripple down" effect on younger age groups--not least by making their work more flexible. Flexible work for older people would influence the terms and conditions of younger workers.
Even if few active steps were taken to reshape retirement, social forces may bring it about in any case. Surely it would be better to work with the grain of those forces. Many of the milestones along the Liquid Lives route are in place already.
Retirement and the financial preparation for old age could be reshaped bit by bit over the next two decades, so that by 2025 the foundations would have been laid for a very different approach to later life and a more flexible, fulfilling, and rewarding old age.
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RELATED ARTICLE: AGING AND RETIREMENT TRENDS: CAUSES AND OBJECTIVES
Several nations in the European Union are addressing the challenges posed by aging, focusing on the key causes and common objectives.
CAUSES OF DEMOGRAPHIC AGING:
* The baby-boom generation will reach retirement age within the next 10 to 15 years.
* The weak birthrate of recent decades.
* Life expectancy continues to rise.
* Preventing social exclusion of elderly people.
* Allowing retired persons to maintain their standard of living.
* Promoting solidarity among and within generations.
* Increasing employment rates.
* Prolonging the professional life span.
* Guaranteeing viable pensions within a context of healthy public finance.
* Adjusting benefits and contributions so as to distribute in a fair manner among generations the financial consequences of an aging population.
* Ensuring that private pension plans are financially healthy.
* Adapting pension plans to new, more flexible employment and career schemes.
* Responding to the aspirations of more equality between women and men.
* Making pension plans more transparent and proving their capacity to overcome the challenges by systematically informing stakeholders.
Source: EUROPA, portal for the European Union, europa.eu.int.
About the Authors
Michael Moynagh is an ordained priest in the Church of England and co-director of the Tomorrow Project, a U.K. charity researching the future of people's lives.
Richard Worsley formerly headed the personnel function in British Aerospace and British Telecom and is co-director of the Tomorrow Project.
Moynagh and Worsley founded the Tomorrow Project in 1996 and are the co-authors of several books on the future of people's lives in addition to their individual publications.
This article summarizes their latest report, The Opportunity of a Lifetime: Reshaping Retirement, which was the result of a two-year project involving a series of consultations, interviews, and focus groups. Copies of the report (2004, [pounds sterling]20) may be ordered from The Tomorrow Project, P.O. Box 160, Burnham Norton, King's Lynn, Norfolk PE31 8GA, United Kingdom. Web site www.tomorrowproject.net.…