Retirement is not always a choice that workers can afford to make

OK, I know this is a niche irritation but I am prone to a serious outbreak of tutting whenever I see or hear reference to the state retirement age. There is no such thing. There is an age at which you become eligible for your state pension — 66 at present and rising to 67 between 2026 and 2028 — but that has nothing to do with retirement.

We do not live in a simple world in which most people work to 66 and then stop. Only a small minority, about 10 per cent, actually leave paid work at that point. Well over half of men and about two thirds of women stop work before 66. Conversely, about a third of men and a quarter of women are still in some form of paid work at age 66, with significant numbers still working well beyond that. You can, and many do, receive your state pension while still earning.

As recent work by my colleague Jonathan Cribb has shown, most of those out of work in their late fifties and many in their early sixties do not consider themselves to be “retired”. Many will say that they are long-term sick or responsible for looking after family but then without changing their economic behaviour will consider themselves retired later on.

That psychology seems to relate to economic opportunity and social norms. Most of those who are well off and leave work before state pension age think of themselves as retired. They tend to have some private pension income, to have paid off the mortgage and be able to live comfortably enough on their own resources.

By contrast, if you are poor and leave the labour market early you are more likely to declare yourself too sick to work and will probably be largely dependent on benefits. You will then start to consider yourself retired once the state pension kicks in, or as it draws near.

Therein lies a broad-brush description of the two groups that are most likely to give up work relatively early. The well-off who retire because they can afford it and the poor who suffer ill health and leave poorly paid jobs to live on often very low levels of state benefits. This indeed is where some of the country’s poorest citizens are stuck in a kind of limbo. Too old, too sick, too discouraged, to earn a decent wage. Too young to qualify for the state pension and associated benefits, which can be more than twice as generous as what is available before pension age.

That leaves a middle group who tend to continue soldiering on in work until pension age. This is where employment rates have risen most. Some no doubt would like to stop work but cannot afford to. This, though, is also a positive reflection of the additional opportunities open to women and growing education levels among both men and women.

Look beyond state pension age, however, and the pattern changes somewhat: it is the wealthiest who are most likely to continue paid work in some guise. As Elon Musk reminded us this week, work is not only about the wage it provides. Some of those who have done best through working life seem to be the ones who are both keen and able to keep on going into their seventies.

This is of much more than academic interest. From a purely economic point of view the loss of output from millions of people leaving work early is big. Participation rates had been rising in the years before 2020 but men on average still stop work at a much earlier age than they did 50 years ago when life expectancy was much lower. What we are not so sure about is whether that loss has grown a lot since the pandemic. We thought it had, based on data from the Office for National Statistics. As a result, Jeremy Hunt put together a package of measures in his March budget to try to encourage more over-fifties back to work.

It turns out, though, that these statistics are rather, shall we say, less reliable than they might be. Other data, from tax returns for example, suggest that the problem is less stark. Both the Bank of England and the Treasury are making policy in a terrible fog as the quality of some of our key economic data has collapsed.

Nevertheless, government policy really can make a difference to the decisions that people aged between 55 and 70 make over work. Raising the state pension age consistently increases employment. Work incentives matter more at these ages because people have more choices. One of the strengths of the UK system is that it is better at incentivising people to stay in work than are those of many European countries.

As an aside, given what we know about the behaviour of the wealthiest, it is not obvious that increasing the amount you can put in a pension over your lifetime, as the chancellor did in March, will result in people working longer. It might, but if it means that they have a bigger pension it could equally result in some retiring earlier.

This pattern of behaviour also exposes a sharp question about the consequences of raising the state pension age. In an era of higher life expectancy, growing numbers of pensioners and evidence that it does lead to longer working lives, it looks like a no-brainer. But when so many with few resources of their own leave the labour market early, largely involuntarily, and subsist on benefits through their early and mid-sixties, it may also extend the period that they live in poverty.

Finally, from the chancellor’s point of view the spike in inflation and interest rates may have one silver lining. They are eating into household wealth. More of us may feel little choice but to work a year or two longer than planned.