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An end to the trend towards early retirement?

Press release
In the 1980s and early 1990s, a variety of financial incentives encouraged a growing proportion of the workforce to retire or leave the labour market early. But this upward trend in early retirement is very unlikely to continue, according to new research by Professor Richard Blundell to be presented at the Westminster Economics Forum on Friday 8 February. Indeed, recent changes to public and private pension schemes are swiftly reducing incentives for the vast majority of men and women to retire early.

Professor Blundell\'s analysis of the prospects for early retirement begins with recent changes in the patterns of life expectancy and labour force participation:

  • Life expectancy has grown and is continuing to grow rapidly in the UK as in most developed countries. It has increased by more than ten years since 1950. Chart 1 shows that the additional life expectancy for those aged 65 is now over fifteen years for men and nearly twenty years for women.
  • Partly as a consequence of this increase in life expectancy, the population as a whole is ageing. Chart 2 shows that the relative proportion over 65 is increasing. Moreover, there is evidence of 'compression of morbidity' - the growth in life expectancy has not been accompanied by a longer time spent with disabilities.
  • Since the 1960s, the participation rate in work for people aged over 55 (especially among men) has fallen quite dramatically. Chart 3 shows that for men in the age group 60-64 the labour force participation rate has more than halved to around 30%. The \'statutory\' retirement date is no longer relevant for many retirement decisions.
  • There are many routes to retirement including the invalidity benefit and incapacity benefit system. Chart 4 shows the strong growth in recipients of this benefit during the late 1980s and 1990s. This growth occurred as much among those individuals with occupational pensions as it did for those in the state pension scheme.

As a nation gets wealthier, it will want to spend more time in leisure activities and retirement is a reflection of this. But individuals will also want to have access to sufficient resources to maintain their standard of living in retirement. With earlier retirement and longer expected lives, this means a need to save more, often considerably more, for retirement.

There is strong evidence that during the 1980s and early 1990s, some people retired or left the labour market \'too early\', partly as a consequence of adverse financial incentives in public and private pension schemes. But the early retirement trends of the 1990s are very unlikely to continue for the majority of men and women in the UK. Professor Blundell points to a number of factors that have conspired - or will conspire - to reduce the incentives for early retirement:

  • There is the decline in generosity of state system (with some exceptions for low-income pensioners - see below).
  • There is the decline in the generosity of invalidity/disability schemes since the 1995 reform.
  • There is the increase in retirement age for women.
  • There is a decline in the value of occupational pension funds and the consequent reduction in opportunities to create early retirement windows.
  • There is a strong move from 'defined benefit' occupational pension schemes to personal pensions or 'defined contribution' schemes among younger workers. This move effectively removes the link between retirement saving and actual retirement.
  • Finally there is the likely reform of many public sector schemes.

There are some notes of caution in this prediction of a change in trend. The very substantial increase in generosity of the minimum income guarantee (MIG) for those over 60 years of age will increase incomes in retirement for certain low income pensioners and the taper rate will reduce the incentives to part retire. The decline in 'back loaded' defined benefit schemes will induce some of those who have moved into defined contribution schemes to retire earlier, no longer having to wait for their 'best years'. The slow growth in the real wages of older unskilled workers and the low demand for their skills will also mitigate against any swift upturn. But these are unlikely to be enough to change the broad conclusion.

To make solid and precise predictions requires good data on individual health, wealth and labour market attachment. Such a source of information has been sadly lacking in the UK. But this will change with the new ELSA data (English Longitudinal Survey of Ageing). This survey collects data from a nurse\'s visit as well as detailed economic, quality of life and psychological information. The first full wave of the new data will be collected this Spring. It promises to revolutionise our ability to make precise predictions and policy recommendations in this important field. See ELSA online.


Notes to Editors

  1. For further information, contact Professor Richard Blundell and Carl Emmerson on the IFS press office on 020 7291 4820.
  2. Richard Blundell will be presenting Pension Incentives and the Pattern of Retirement [575KB] at the Westminster Economics Forum on Friday 8 February 2002. The research report, co-authored with Costas Meghir and Sarah Smith, will be published in the March 2002 issue of the Economic Journal.
  3. The Westminster Economics Forum is a forum for policy makers and business launched by the Economic and Social Research Council (ESRC) and the National Institute for Economic and Social Research (NIESR).
  4. Richard Blundell is Professor of Economics at University College London, Director of the ESRC Centre for the Microeconomic Analysis of Fiscal Policy at the Institute for Fiscal Studies (IFS) and Research Director of IFS.