The 2014 Pension Act included a provision for regular - every 6 years - reviews of the State Pension Age (SPA), and in March this year, the government published the terms of reference for the first such review. The hope is that it will be a relatively speedy process, with just over a year being allowed for completion (publication expected in May 2017). The review will consider “what a suitable State Pension age is, in the immediate future and over the longer term; whether the current system of a universal State Pension age rising in line with life expectancy best supports affordability, fairness, and fuller working lives objectives; and, if not, how State Pension age arrangements might better support these objectives”.
The terms of reference also state that “in conducting its analysis and reaching recommendations, the review is to have regard to variations between different groups”, and it is this last point that provides the focus for the submission by the Trades Union Congress to the review. The submission uses data on economic inactivity for older people below SPA from the Labour Force Survey to support their argument that the current policy commitment to increasing the SPA runs into problems because it fails to address two major challenges for public policy as life expectancy continues to increase: how to enable those older workers who want to work to do so; and how to ensure that those who cannot work are provided for. Raising the SPA, they say, does not succeed in encouraging longer working lives, and it risks imposing hardship on older people who are forced out of the labour market before SPA. If it is granted that these challenges provide us with two key tests for assessing the policy, then it fails on both counts.
The first part of the TUC’s case is that an increase in the SPA is likely to have only a relatively small impact on the timing of exit from the labour force, and that this calls into question its effectiveness. Why does the TUC think that this is the likely outcome? Mainly because the SPA is a retirement trigger “for only some workers”. These are the people who retire at what is for them the earliest opportunity, which is when they can afford to do so, and in this matter the age at which they become entitled to the State Pension is the decisive consideration [1]. Everyone else in the relevant age groups can be placed in one of three categories. First, there are those ‘lucky’ individuals who have occupational pension rights that enable them to retire before SPA, and this is what they do. In other words, they too retire at the earliest opportunity, but for them the age at which they become entitled to the State Pension is not a decisive consideration. Second, there are those people who work beyond SPA, partly because they can, and partly they have a good reason to take advantage of the opportunity to remain in work, e.g. they enjoy it or they need the money. Third, and this is the group of most concern to the TUC, there are those individuals who have already left the labour market by the time they reach SPA, which means that the trigger for leaving the labour market is something else, such as an obligation to provide care at home, personal ill-health or disability, or redundancy. What triggers their exit from the workforce is not an opportunity - the opportunity to retire with a pension - so much as a problem. The weakness in a policy that relies heavily on raising the SPA for encouraging longer working lives is that this third group make up a very large proportion of the workforce. It includes a majority of women and a large minority of men, and they “are unlikely to be impacted by changes in State Pension Age”. If a large proportion of the population fall into this category then the effect of an increase in SPA on average timing of exit is limited. This is true of course, but how does it affect an assessment of the policy’s effectiveness? Is it not reasonable to argue that the policy is effective provided it has a non-negligible effect on the average age of exit from the workforce (which would result mainly from people in the first category retiring later)? Even if it turns out that one of the (unintended) consequences of an increase in the SPA is to increase the proportion of people in the third group, i.e. who are ‘pushed’ into making an early exit from the labour force, there is no reason to think that this would offset the positive effect of the policy on the average age of exit. The fact that the policy influences the timing of exit for only some people in the workforce does not mean that it is ineffective. It means rather that the most effective approach to the challenge of increasing the average age of exit will include other measures (besides the link between SPA and increases in life expectancy) designed to encourage and enable workforce participation in people who “are unlikely to be impacted by changes in State Pension Age”.
The real force of the TUC’s objections to a policy of continuing to raise SPA in line with life expectancy has to come therefore from the second part of their argument, which focuses on this same category of individuals, people who exit from the workforce before SPA because there is something that prevents them from continuing to work. To suggest that a policy of raising the SPA constitutes any kind of solution to the predicament of people in this position would of course be absurd. The point that the TUC wants to make, however, is that such a policy penalises people in this position; it restricts their access to benefits, and ‘should be resisted’ (p10). It exacerbates their predicament. Although the TUC document describes the policy as ‘crude’ and ‘mechanistic’, it seems, however, to stop short of a clear and unambiguous proposal that some groups of individuals should be exempt from the normal requirement to reach the SPA before having access to retirement benefits, or that some form of early retirement – i.e. early entitlement to State Pension benefits - should be available to people with health problems or caring responsibilities that effectively prevent them from working.
The TUC argument, it should be noted, is different from the line taken in a recent report from the Pension Policy Institute, which urges the government to take account of inequalities in life expectancy and healthy life expectancy when considering how to implement a rise in SPA. The point applies as much to people who leave the workforce at SPA as to those who leave earlier. The PPI’s main argument is that a policy which uses existing knowledge of inequalities in life expectancy to adjust the age at which different categories of individuals become eligible for a state pension is fairer than a policy which gives everyone access to benefits at the same age. It is fairer because it would promote an ‘equality of outcome’ - the numbers of years spent in retirement with a state pension - across different socio-demographic categories. Although PPI acknowledge that there is room for debate about how to correct for the fact that some groups of people lose more by a blanket increase in SPA than others, the need to make such corrections is seen as a matter of principle.
[1] We assume here that they do not retire at SPA because their employer mandates retirement at this age.
About the Author:
Kenneth Howse is a Senior Research Fellow at the Oxford Institute of Population Ageing. He is also a key member of The Collen Programme on Fertility, Education and the Environment.
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