Keeping older workers could hold the key for UK economy

Retire at 70. It’s not a welcome message for anyone who’s already worked for the best part of half a century. Yet it’s one that was recently delivered to workers across Denmark.

With Britain’s state pension age under review and the public finances under strain, speculation is mounting that Britons will have to follow suit. This is even though many in the UK aren’t even making it to 66 – the current state pension age.

For years, raising the state pension age was regarded by policymakers as the closest thing to a fiscal silver bullet. With just a few strokes of a pen, governments could raise billions of pounds with a policy that delayed the pain for most workers for decades.

Analysis by the Office for Budget Responsibility (OBR), the government’s tax and spending watchdog, shows that lifting the state pension age from 66 to 67 as legislated between 2026-2028 will cut borrowing by £10.5bn by 2030. Most of these savings come from around 820,000 66-year-olds having to wait another year to get their state pension. But the policy also keeps more people in work.

When the pension age rose from 65 to 66 in 2020, research by the Institute for Fiscal Studies found that it encouraged an extra 25,000 men and 30,000 women to stay in work for a year. That is the equivalent of 1.8 million more hours worked per week, boosting both their earnings and the Treasury’s coffers.

But rising ill-health and slowing life expectancy mean that returns from this policy are dwindling. And the consequences are bad both for the public purse and for a generation of workers who risk being left behind well before they reach retirement age.

It wasn’t always like this. In the 1970s, the government actively encouraged older workers to leave the workforce early, believing it would free up roles for the next generation of talent. The Job Release Act 1977 even sparked debate over whether men should retire at 60, like women.

But financial pressures ultimately meant the policy went in the opposite direction. And the idea that younger workers would replace their older colleagues proved a fallacy. In the end, the UK ended up with the worst of both worlds: rising early retirement and higher youth unemployment.

History is now in danger of repeating itself, but for very different reasons. Official figures show there are roughly 1.7 million people aged between 60 and 64 who are economically inactive, compared with 1.55 million 35- to 49-year-olds.

Research by Standard Life suggests that if these trends continue, there could be nearly 770,000 more workless people by 2029. This would bring the total number of people aged between 60 and pension age who aren’t working to 3 million, up from 2.2 million today.

This is a problem for politicians who want to raise the state pension age again: to 68 by 2044-2046. And who know, but won’t say out loud, that they need to bring this forward to help balance the books. After all, spending on the state pension has increased by 70 per cent in real terms over the past two decades. Realising this, Jeremy Hunt, the former chancellor, attempted to bring the increase to 68 forward to the late 2030s. However, he was forced to shelve the plans following a decline in life expectancy.

Changes that started even before the global pandemic mean a man aged 66 in 2050 is now projected to live until he is 87, compared with 90 back in 2014. There is also evidence that a growing number of older workers are struggling with low incomes and ill health in the decade before retirement. The problem will only grow as more and more people fail to get on the property ladder, leaving them with the daunting prospect of renting into retirement.

Researchers at Standard Life warned last year that pre-retirement poverty is “a big, new and growing problem”. The pension provider said a quarter of all 60- to 65-year-olds live in poverty, with 800,000 more in this group in 2022 than there were in 2010.

One of the problems is ageism. Although government policy may no longer actively encourage retirement, many older candidates for a job are unable to even get a foot in the door. Andy Haldane, the former chief economist of the Bank of England, has described ageism as “one of the few remaining acceptable forms of discrimination”. Phoenix, which owns Standard Life, said ageism was also often “deeply ingrained” in recruitment processes.

Companies must not write off some of Britain’s most experienced workers. And the government must not lose sight of the fact that achieving anything close to an 80 per cent employment rate will require all workers to play their part.

This means that while the young and workless may be grabbing the headlines, more support to find work will be needed to ensure older workers aren’t left to languish in the years before retirement.

This brings us back to the original exam question: how long should Britons be expected to work? With governments in a tight fiscal spot, the tempting answer is to say “‘til you drop”.

But without proper support, many will be left by the wayside long before then.