Site icon AgeWage: Making your money work as hard as you do

“Saved enough to stop work?” – the impact of pension freedoms on the labour market

henry tapper

Universal credit claimants will be forced to search for jobs outside their preferred sector after just four weeks or face the prospect of sanctions, under a controversial tightening of the benefits system.

Therese Coffey, the work and pensions secretary, said the move would help people “to get any job now” and forms part of a new government drive to get 500,000 jobseekers back into work by the end of June.

The problem , according to Tony Wilson is not as it seems

And maybe the DWP are barking up the wrong tree

This is not a welfare problem. it’s a problem with participation. A large proportion of the population is not claiming universal credit or working

Early retirement?

The Labour Force Study conducted by the Office of National Study makes for dismal reading. Here is the IES’ assessment

Employment remains 600 thousand below pre-pandemic levels while economic inactivity is 400 thousand higher.
This growth in inactivity is increasingly being driven by higher worklessness due to ill health, which is up around 200 thousand in the last six months (and by 230 thousand
since the pandemic began). It is also rising for young people outside full time education, and falls in labour force participation have been particularly large for older people.

In all there are now 1.1 million fewer people in the labour force than we would have expected to see based on pre-crisis trends, and older people account for three fifths of this ‘participation gap’.

I queried this final finding quoting from recent IFS research  which suggests that many people who have no income but the state pension are working longer

The increase in employment resulting from the higher state pension age is due to people staying in their existing job for longer, rather than to those in work moving to a different employer or those not in paid work returning to the labour market. It is predominantly due to increases in full-time work rather than part-time work. For men it is disproportionately driven by the self-employed, while women working in the public sector are particularly likely to delay retirement due to the reform.

I would suggest that what is  being missed is the “pension effect”

Women are working longer because they are no longer in receipt of a pension from 60, the self-employed are working longer because they have little in the way of a private pension and no other source of income.

Meanwhile 630,000 people in their late fifties and early sixties are not working but accessing their retirement savings early. There is evidence of this from the FCA’s retirement income survey covering those with retirement pots created through personal pensions,

That’s 1.6m pots being drawn on , the majority of which were cashed out into people’s bank accounts. The vast majority of pots cashed out were under £30,000, suggesting this money is not being used to provide lifetime income.

These numbers exclude annuities purchased and pots  being drawn down or  cashed out from occupational DC schemes.

TPR’s latest data shows that the number of people  “retiring” from occupational DC schemes  increased by 24% between the end of 2020 and 2021 (from 121,000 to 151,000).

This does not even touch on the numbers taking pensions “early” from Defined Benefit schemes.

My experience is that most people of my age are not working five days a week but using retirement savings and/or pension income either to stop work or to work part time.

Is this the money allowing 630.000 to choose not to work ?  Are the pension freedoms creating the participation problem?

Adjusting for the pensions effect

I spent part of yesterday listening to a debate on the Labour Force Study and the new ONS real time information on participation rates.  I asked a question as to whether there was a pension effect in labour trends and this seemed to be an area that nobody is thinking about.

People who work in pensions worry about the sustainability of pension pots which are drawn on heavily prior to people’s state pension age. Meanwhile economists lament the absence of people of this demographic from the labour market.

They ask the question “where are the older workers“, the answer just might be that they are busy spending their savings.

But while those with retirement savings have the freedom to use them as a means to stop work early, those without pots to draw on – are working longer. If my reading of the situation is correct, we have a pensions effect that bi-furcates the older workforce. I agree with Tony Wilson, this does not look like a welfare problem. It is a problem with participation and that problem is created by the weight of money becoming available to people from aged 55.

Rather than chasing after those on welfare, Therese Coffey might focus on encouraging those in later  life to keep working, keep saving and to delay gratification.

Otherwise we risk people running out of retirement savings way too early and HMT out of productive workers to support their healthcare and income benefits in later life.

Therese Coffey

 

 

Exit mobile version