John FitzGerald: Why longer working lives benefit society

Facilitating the over-65s to stay at work increases productivity and saves on pensions

Data show that the proportion of the population in the dependent age groups will continue to rise for the foreseeable future, creating upward pressure on pension spending, and thus on taxes, for at least the next 30 years. File photograph: Getty Images

Data show that the proportion of the population in the dependent age groups will continue to rise for the foreseeable future, creating upward pressure on pension spending, and thus on taxes, for at least the next 30 years. File photograph: Getty Images

 

The very good news is that life expectancy has risen dramatically. As a result, the number of people aged 65 and over is rising by 3.5 per cent a year. Having just received my free travel pass, this is all of greater personal interest to me than it would have been a decade ago.

The other side of this good news story is the cost to our society and the public finances of supporting ever-increasing numbers of people in the older age groups.

Figure one shows the economic-dependency ratio (that is, the ratio of those who are working to those who aren’t) alongside the age-dependency numbers, which show the proportion of young and retired people to the population of working age. These two measurements capture the changing pressures on the economy over a long period as a result of underlying demographic changes.

These data show that the proportion of the population in the dependent age groups will continue to rise for the foreseeable future, creating upward pressure on pension spending, and thus on taxes, for at least the next 30 years.

This contrasts with the Celtic Tiger years, when a key driver of increased living standards was the dramatic fall in the dependency ratio.

While in the late 1980s there were 1.7 dependent children or pensioners for every worker, this had fallen to a ratio of one to one by 2005. Individual families, and society as a whole, had fewer dependents to support, a factor that helped keep taxes low and boost personal living standards. However, since 2005, the dependency ratio has begun to rise in a period that has coincided with the economic crisis.

john fitzgerald image one

fitzer table

Dependency gap

Figure one shows age dependency rising continuously, while the economic-dependency ratio is forecast to stabilise temporarily over the coming decade. The gap between the trends in age dependency and economic dependency arises from the likelihood that labour-force participation, especially by women, will increase.

Women now reaching pensionable age are the last generation not to have received free second-level education and the last affected by the marriage bar on women’s employment. Their younger sisters, who stayed longer in education, are more likely to be at work.

Now, a majority of new young entrants to the labour market will have a third-level degree. As table one shows, those with third-level education are much more likely to be in the labour market than those who finished their education at an earlier stage. Thus the next decade is likely to see a lot more women in the workforce, including more over-50s.

Although, for men, there will be no “bounce” in participation due to a marriage-bar effect, rising education standards should continue to drive increased levels of workforce participation.

As shown in figure two, while participation rates for those in their early 60s with third-level education fell over the past 15 years across the EU-15, the pattern has been different in Ireland. Here, in spite of the economic crisis, participation rates have continued to rise for this age group. A continued rise in workforce participation by the over-60s could significantly alleviate the cost to society of pensions.

A series of studies done by the National Institute for Economic and Social Research in London have looked at the effect on the UK economy of raising the pension age and encouraging people to work longer. The institute’s work suggests that raising the pension age and lengthening working lives by one year would raise UK GDP by 1 per cent and reduce the government deficit by 0.6 per cent of GDP.

Some of the economic benefit would be attributable to a reduction in spending on pensions, but more of it would be due to the increased output resulting from over-60s staying on at work. It is likely that a similar exercise for Ireland would show similar results.

Pension age raised

The State pension age was raised from 65 to 66 from January 2014 and is scheduled to rise again, to 67 in 2021 and to 68 in 2028. This will counterbalance, to a degree, the rising cost of pensions as more people live longer. It makes economic sense to encourage those who can continue working beyond 65 to do so, thereby raising national living standards.

There remains, however, the anomaly that many employment contracts, including those for public servants recruited prior to 2004, require retirement at 65. People whose social welfare pension is now delayed a year have to sign on the dole to bridge the gap.

At a time when public policy is striving to reduce the numbers on the unemployment register, it makes no sense to have a gap between the new higher State pension age and a lower compulsory age of retirement.

Across the globe, a standard retirement age of 65 dates back to a time when most employment was manual, and when average life expectancy was not much more than 65. Today, reaching 65 should no longer be a barrier to those who can and who want to work.

Hillary Clinton (68) and Michael Noonan (72), to name just two examples, show that being over 65 is no hindrance to making a contribution or to an appetite for hard work. Our economy, our society and our public finances would all be better off if those who wanted to continue working past 65 were facilitated to do so.

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