Guest comment: Do we need to rethink our pensions system entirely?

New research by the Institute for Fiscal Studies shows that Covid-19 has forced one in eight over-50s to change their retirement plans, with 8 per cent planning to retire later. And a new report from the Resolution Foundation found that the over-65s have been among the hardest hit by furloughing and job losses during the pandemic.

In addition, last week the State Pension Age rose to 66 – a reminder of the ongoing dilemma presented to policy-makers by rising life expectancy. The current crisis has forced those planning on retiring in the next few years to rethink, but should it prompt us all to think differently about retirement?

Our current approach is based on a ‘three-stage’ life: education, work, and retirement. But as we live for longer, this idea is becoming outdated. Millennials are spending longer in education, starting careers and having families later.

One in three babies born today will live to 100, and we are on average living many years longer than previous generations. The idea that we can spend a third of our adult lives in retirement seems increasingly unrealistic, and means people risk burning out in mid-life as they work ever-harder to try and save enough for a comfortable retirement.

Our recent research on the impact of lockdown on people in their 50s and 60s found that many valued the chance to get a better work-life balance. As we live for longer, most of us will need to extend our working lives – so we need to think about how we can make our work more flexible, especially in the transition to retirement.

The increased flexibility introduced by many employers as a result of the lockdown could make it possible for more people to continue working for longer. We also need new financial products and incentives which enable us save flexibly when we are earning for the times when we are not earning, and smooth our income and savings over our life course.

At the same time, as individuals we may have to re-think our assumptions about the spending patterns and lifestyle we expect to have throughout our lives. The reality is that most of us don’t save as much as we need to in order to maintain our standard of living into retirement and low interest rates mean savings are generating less income than they did in the past. Perhaps adopting a more moderate lifestyle throughout our working lives would make for a sustainable retirement.

Many people, however, don’t have these choices. For plenty of people, getting by in mid-life is a struggle – with little left for saving. And there are many, of course, for whom their health prohibits working into their 60s and 70s. At the same time, we are seeing many people out of work well before state pension age because they face barriers to getting back into the workforce – this is a particular worry for those currently facing redundancy as the furlough scheme ends. So we need to ensure there is a proper safety net for those unable to extend their working lives, or to build up enough savings for a decent retirement.

One suggestion is a ‘universal basic income’: a payment made to people of all ages to provide a basic standard of living. In many ways, the state pension is a ‘universal basic income’ for the over-66s – why not create a genuinely universal basic income for people of all ages? This would remove many of the barriers to proving eligibility for out-of-work benefits and would change the relationship between work and other non-paid activity – placing equal value on contributions of people of all ages.

Whatever the solution, it’s clear that our current pensions system is unsustainable. Without action, we risk seeing many people simply run out of savings and falling back on the benefits system in the years ahead – exacerbated by Covid-19.

As well as products and incentives which encourage people to save more responsibly, we need to ensure that support is available at all ages for those who aren’t able to work, and more flexibility is built into the pensions system. Retirement as we know it may be a thing of the past but we must find a way to provide a decent standard of living for all.

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