Government incentive plans are focused on wrong groups of workers

This large “Covid cohort” of older workers was targeted by the government as ripe for reversing their retirement, as economic inactivity among the working age population rose sharply during the pandemic. 

The numbers, said to have increased by 830,000 between 2019 and 2022 – though this is moot according to LCP data – with three-quarters of the rise concentrated among those aged 50 and above.

Budget may offer incentives

It is thought likely that chancellor Jeremy Hunt will offer this group incentives to re-enter the workforce in his Spring Budget on March 15. However, this is unlikely to be as successful as the Treasury might believe, says the Resolution Foundation.

During the pandemic, the increased labour market exits were disproportionately from higher-than-normal retirements among higher-paid professionals, the report states. The number of those leaving employment for retirement from many low-paying occupations actually fell. 

It says that it will be difficult to persuade these people – two-thirds of whom own their own home outright and therefore have low living costs – to “unretire”.

The fact is that retirement is not typically “phased” in reverse. Someone who took early retirement in the summer of 2020 has now been economically inactive for two-and-a-half years, say the authors of the report. Data shows that only 2 per cent (one in 50) in this situation return to work every three months.

Benefits are of no help 

Targeting more support via the benefits system will not work, as only one in 10 of the economically inactive 55 to 59-year-olds who left employment since the start of the pandemic rely on the support of benefits.

Instead, policymakers should focus on three groups: older workers, mothers and those with ill-health or a disability. Past experience shows that progress can be made here, say the authors. 

Employment rates in the UK in the decade before the pandemic rose by 13 per cent for women aged 55 to 64 (4 per cent for men) and by 5 per cent for coupled mothers, while the employment gap between those with or without a disability fell by 5 per cent between 2013 and 2022.

Demographic changes mean there will be many more older age workers in the UK in the 2020s – the number of people aged 65 and above will rise by 2.5mn between 2020 and 2030.

Tighten up freedom and choice

Raising the state pension age is too narrow a focus, as it disproportionately impacts those on lower incomes and poor locations with lower life expectancies, the report states. 

To discourage early retirement, previously fuelled by the government’s freedom and choice reforms in 2015, the minimum age at which people can draw their private pension should be increased, it suggests. Currently, this is due to rise from age 55 to 57, but remains 10 years lower than the state pension age.

The report also calls for the maternal employment gap to be addressed, increasing participation rates among low-income women. This was just 50 per cent among low income women aged 25 to 54 in 2017-19, compared with 94 per cent among high-income women of the same age.

Childcare policies must dovetail with work incentives and universal credit, as increasing the free childcare hours will only encourage already working parents in middle and high-income households to return to work, rather than boost employment among lower-income households. 

The report also covers the need for wider policy agenda to tackle the underlying causes of those living with disability or ill health, including the rise of mental ill-health, to help those affected stay in employment.

Unless these three areas are tackled, the report warns that the economic inactivity rate for 15 to 75-year-olds is set to rise from 29.5 per cent to 30.8 per cent by 2030. This would be its highest rate since 2001.

“Britain did a great job of getting more people into work in the 2010s. But some of that progress has been undone by the pandemic, with economic inactivity rising by 830,000 over the past three years,” said Resolution Foundation economist Louise Murphy.

Better focus on those who need work is required 

“We need to reboot progress on getting people into work, but we’re not going to achieve it by persuading the recent Covid cohort of older workers to ‘unretire’.

“Instead, we need to do more to encourage mothers in low-income families into work, and help people who need to take periods of time off for ill-health stay attached to their jobs,” Murphy continues.

“Taking the right approach to workforce participation would boost individuals’ living standards and improve the wider health of our economy.”

A range of measures have been touted as on the chancellor’s wish list, including reforms to potential tax relief to encourage work and saving, a wider rollout of “mid-life MOTs” to discourage people from retiring into inadequate defined contribution pension pots, and even a tax break for older workers returning to work.

Avoid tinkering at all costs

But LCP partner Sir Steve Webb said the government needs “to avoid knee-jerk pension reforms in the Budget” as a result of falling economic activity among older workers. 

“While the desire to make later life work more rewarding is laudable, this should not be at the expense of yet more incremental tinkering with the pensions system,” he said. 

The idea in the Resolution Foundation report for raising the minimum age at which people can access their pensions would be a “backward step”. 

“The existing plan to raise the age to 57 is already adding to the complexity of the system, and further increases would add more complexity with no obvious benefit,” Webb said.

“There are some people who have retired early during the pandemic, but this will often be combined with a secure final salary pension and changing pension rules for DC schemes will not affect this group.

“Any changes to pension rules need to be justifiable for their own sake and not a knee-jerk reaction to the rise in economic inactivity.”