beta

You're viewing our new website - find out more

Publication - Research Publication

An Investigation of Pensioner Employment

Published: 27 Jun 2016
ISBN:
9781786523440

The report explores the drivers behind the consistent increase in pensioner employment over the past decade, including throughout the last recession. It discusses the employment characteristics and socio-economic conditions of pensioners who continue to w

45 page PDF

932.8kB

45 page PDF

932.8kB

Contents
An Investigation of Pensioner Employment
Background

45 page PDF

932.8kB

Background

Population ageing presents a fiscal challenge to most Western countries

Due to low fertility and increasing life expectancy, the population is ageing in Scotland and most Western countries. Population projections suggest that the population above state pension age in Scotland may increase by nearly 30% from around 1,059,000 in 2014 to around 1,367,000 in 2040. In contrast, the working age population is projected to increase by only 1% from around 3,377,000 in 2014 to around 3,419,000 in 2040.

The chart below shows the old-age dependency ratio, i.e. the number of pensionable age people per 100 working age people. A high old-age dependency ratio indicates that a greater proportion of the population are pensioners, placing a greater pressure on the working age population to generate sufficient tax revenues.

Figure 1: Projected old-age dependency ratio, Scotland 2014-2040

Figure 1: Projected old-age dependency ratio, Scotland 2014-2040

Source: ONS 2014 based population projections

Scotland's position is very similar to that of the UK and old age dependency ratio projections for both Scotland and the UK are estimated to be below the EU average by 2040. Figure 2 sets out Scotland's old age dependency ratio in comparison with the UK and the 28 EU countries. Scotland's projected old-age dependency ratio by 2040 is among the ten lowest across the EU.

Figure 2: Projected old-age dependency ratios, comparisons with UK and EU (not adjusted for increases in state pension ages)

Figure 2: Projected old-age dependency ratios, comparisons with UK and EU

Source: Eurostat, Population projections EUROPOP2013

However, as the proportion of older people increases, demand for health care increases, placing additional demand on Government and private resources. Some have suggested that population ageing may also slow economic growth, lowering overall labour market participation rates and reducing savings rates [3] . As state pensions and benefits are largely paid for by the working age population, ageing is expected to place considerable pressures on fiscal sustainability in the future.

The rising state pension age is extending working lives

Prior to April 2010, women reached the state pension age ( SPA) at 60. Between April 2010 and March 2016 the SPA for women increased to 63 and will increase to 65 between April 2016 to November 2018. The changes do not affect the SPA for men, which remains at 65 . In the UK there is already evidence that people are starting to work longer in response to increasing SPA [4] .

From December 2018, the SPA for both men and women will start to increase to reach 66 by October 2020. Under the Pensions Act 2014, the increase in the SPA from 66 to 67 has been brought forward by eight years. The SPA for men and women will now increase to 67 years between 2026 and 2028. The way in which the increase in SPA is phased in has also changed so that, rather than reaching SPA on a specific date, people born between 6 April 1960 and 5 March 1961 will reach their state pension age at 66 years and a specified number of months.

Retirement culture in Scotland and the UK - international comparison

The OECD average for women's normal pensionable age [5] , the ' SPA' in the UK, is 63.1 years whilst for men it is 64 years. In 2015, UK's SPA was 63 years for women (nearly the same with OECD average) and 65 years for men (one year higher than OECD average).

Figure 3 shows the normal state pension Age in OECD countries and compares it with the actual, effective exit from the labour market. Average effective age of labour market exit in the UK was 64.1 for men (nearly a year less than SPA) and 62.4 for women (the same with SPA), and in both cases a little lower than the OECD averages of 64.6 for men and 63.1 for women.

Figure 3: Average effective age of labour market exit [6] and normal pensionable age in OECD countries in 2014

Figure 3: Average effective age of labour market exit[6] and normal pensionable age in OECD countries in 2014

Source: OECD (2015) Pensions at a Glance. Chapter 7: Effective Age of Labour Market Exit

When compared with Scandinavian countries, men and women in the UK tend to effectively retire later than workers in Denmark but earlier than men and women in Sweden and Norway. When compared with Germany, UK male workers tend to retire later by 1.4 years whilst female workers effectively retire slightly earlier by 0.3 years.

The following chart shows how much average effective age of labour market exit has changed for men and women. Since 1970 average effective retirement for men has decreased by 3.9 years whilst for women by 3.3 years. Since the 1970s the average age of effective labour market exit has followed a decreasing trend reaching a low in the early 2000s, at around 63 years for men and around 61 years for women. During the last decade, age of labour market exit has increased by 1.5 years for men and 2 years for women.

Figure 4: Average labour market exit age in OECD countries, 1970-2014

Figure 4: Average labour market exit age in OECD countries, 1970-2014

Source: OECD (2015) Pensions at a Glance. Chapter 7: Effective Age of Labour Market Exit

Increasing life expectancy is extending working lives, but lower increases in healthy life expectancy may restrict this

Figure 5 shows that life expectancy in Scotland is increasing consistently for both genders. This might be expected to further increase incentives for individuals who do not want to be reliant on public provision to work longer into a later retirement.

However, whilst data shows that life expectancy is growing steadily, the most recent data on healthy life expectancy is very variable, and across the years 2009-2014 varied at around 60 years for men and 62 years for women. This implies that although people can expect to live longer, future pensioners may begin to expect longer periods of morbidity or care requirements, with implications for public and private resources.

Figure 5: Gap between life expectancy and healthy life expectancy - men and women.

Figure 5: Gap between life expectancy and healthy life expectancy – men and women.

Source: Scot PHO - The Scottish Public Health Observatory

However, whilst theory suggests that workers who expect to live longer and healthier lives should retire later than those who expect a shorter life span, this is not always supported by empirical evidence. Some research [7] suggests that increasing healthy life expectancy may not necessarily increase labour supply: individuals expecting to live a longer healthier life opt to stay longer in education in order to get higher earning jobs which in turn enable them to save more to finance an early retirement. A feasible behavioural response to improving health in old age is that people choose to work less overall and enjoy more leisure and early labour market exit.

There are considerable variations in healthy life expectancy at birth in Scotland among different geographical and socio-economic groupings. In 2013-2014, male healthy life expectancy ( HLE) at birth in the 10% most deprived areas in Scotland was 47.6 years, 25.1 years lower than in the least deprived areas (72.7 years). Female HLE at birth was 51.0 years in the most deprived areas in 2013-2014, 22.1 years lower than in the least deprived areas (73.2 years) [8] .

This is likely to be a key factor in explaining why earnings are a limited income source for pensioners at the lower end of distribution - explored later in this report.

Pensioner employment has grown strongly, despite the 2008 recession

Whilst Scottish employment since 2004 has declined strongly for the youngest age group (16-24) and remained relatively flat for the 25-49 age group, the oldest age groups showed the highest increases. Between 2004 and 2015, the employment rate for older workers (65+) in Scotland has increased steadily from 5.2% to 8.2%. In 2015, 80,000 pensioners were in employment, a 94% rise in employment level since 2004.

Figure 6: Employment rate in Scotland by age, 2004 and 2015

Figure 6: Employment rate in Scotland by age, 2004 and 2015

Source: Annual Population Survey, Jan 2014 to Dec 2015

Employment growth in the 65+ age group remained positive in eight out of eleven years between 2004 and 2015, and showed relatively little sustained impact of the 2008 recession when compared to younger age groups. Between 2004 and 2015 in Scotland, the employment rate for female pensioners grew by over 2.5 percentage points whilst the men's rate grew by around 4 percentage points. However, despite employment rate of female pensioners growing steadily over the past decade it has slightly fallen by 0.6 percentage points over the last year.

As shown in the following chart, the employment of pensioners in Scotland increased considerably after 2011. This suggests that a change in legislation [9] in 2011, preventing employers from compulsorily retiring workers once they reached 65, has had a positive impact on pensioners in Scotland carrying on in their employment.

The chart also shows that pensioner employment is slightly lower in Scotland than in the UK for both men and women. Part of the reason may be people aged 65 in Scotland have lower healthy life expectancy compared to Great Britain, by 1.5 years for men and 1.2 years for women [10] . Life expectancy is also lower in Scotland - around 1.2 years for both men and women.

Figure 7: Pensioner employment rates in Scotland and the UK, 2004-2015

Figure 7: Pensioner employment rates in Scotland and the UK, 2004-2015

Source: Annual Population Survey, Jan 2014 to Dec 2015

Over half of workers beyond state retirement age in Scotland report that they are not ready to stop working yet

The main reason pensioners remained in work was that they were not ready to stop work yet (57%). Around 13% had chosen to remain in work to pay for essential items ( e.g. bills) while 8% had remained in work to boost their pension income. For 7% of pensioners choosing to stay in work the reason was skills and experience required for the job whilst 6% remained in employment to be able to buy desirable items. Around 20% of pensioners stayed in work for other reasons, such as opportunities to work flexible hours, wanting to stay mentally/physically fit and a wide range of personal reasons.

Pensioner employment is not to the detriment of young workers

The increase in pensioner employment appears not to be to the detriment of young workers. A recent study by the European Parliament [11] suggests that there is no empirical evidence for crowding out, i.e. the increasing number of older workers has no effect on younger workers' entry into the labour market.

Pensioner employment and contribution to public finances

The 2013 Fiscal Sustainability report by the OBR [12] discusses the positive impacts of older worker employment on economic growth and public finances. It argues that as older workers continue to work, more people contribute to total output increasing growth in the longer term. In addition, working pensioners pay income tax contributing to public finances and whilst they are not required to pay employee National Insurance Contributions ( NICs), increases in NICs revenue could be generated through employers' contributions.

However, older workers are more likely to work in part-time jobs or in self-employment. Income tax and NICs receipts are lower in these types of employment. Indeed data on the economic activity status of pensioners suggest that in 2015 the majority of working men and women over the age of 65 in Scotland were working part-time. In particular, 56% of male workers and 79% of female workers over the age of 65 were occupied in part-time jobs.

Whilst many people of pensionable age are dependent on state support, as a group they remain substantial contributors to taxation through income tax and indirect taxation such as VAT and other indirect taxes. The following chart shows average household contributions by income quintile in the UK. Average retired household contributions across the whole income distribution are around 36% of working age households.

Figure 8: Direct and indirect taxation at household level, 2013/14, UK

Figure 8: Direct and indirect taxation at household level, 2013/14, UK

Source: Office for National Statistics

Figure 9 shows that as a proportion of gross income, lower income households contribute substantially more to indirect taxation than higher income households. As would be expected, income tax as a proportion of gross income is lower for lower income quintiles. The implication of this is that lower income retired households are contributing disproportionately to tax revenues. This is consistent with the generally regressive nature of indirect taxation across all households.

Figure 9: Average retired household tax spend as a proportion of gross income, 2013/14, UK

Figure 9: Average retired household tax spend as a proportion of gross income, 2013/14, UK

Source: Scottish Government calculations based on Office for National Statistics data

Figure 10 shows that, in terms of receipt of cash benefits (including state pension) and benefits in kind (largely NHS services), retired households in the bottom 40% of the income distribution receive roughly equivalent amounts to working age households, but the gap opens up for higher quintiles, with retired households receiving more in total. It is noticeable that higher quintile retired households receive more in cash benefits than lower quintile retired households. This may be because they are more likely to have complete NI records and receive more via the additional state pension based on higher NI contributions.

Figure 10: Cash benefits and benefits in kind, 2013/14, UK

Figure 10: Cash benefits and benefits in kind, 2013/14, UK

Source: Scottish Government calculations based on Office for National Statistics data


Contact