This article was originally commissioned and published in for the January 2014 edition of the Investment Life & Pensions Moneyfacts publication.
In the first part of a two part series, Tom Murray explores what society might be like in a new age where people no longer retire in the traditional manner.
Cradle to Grave
The cliché “cradle to grave” is a rhetorical device that covers the entire gamut of life’s experiences from birth to death, including by implication the educational stages, working life, and retirement. This addition of retirement is a relatively new phase, as it was not until the end of the 19th century that the concept of retirement became a reality for the majority of the population. Until then, one just worked until one could no longer do so and if one hadn’t died by then, one struggled to survive without an income, (I’m ignoring the minute proportion of the country’s working population who actually earned enough to stop working as they formed such a small group they could reasonably be identified with lottery winners in today’s society).
Given increasing longevity and the less physical nature of a lot of the work done in the 21st century, the question is whether the retirement phase will fade away as quickly as it came, leaving us with one less stage in life as we all essentially work until we die. If so, are the products that the financial services sector are currently providing up to the task of delivering what the public will need in the next few decades? This article, the first of a two part series, proposes to look at what society might be like in a new age where people no longer retire in the traditional manner but adapt their working life to cope with their ageing until they get to the point where only illness or death makes them exit the workforce. In the follow-up article, I aim to address the financial needs of this new workforce and see what changes the current product sets will need in order to be attractive in this new era.
What is leading to this?
There are a number of factors at play that are leading to the shrinking of the retirement phase and these factors may well bring about its complete elimination. They are as follows: the increasing longevity of the population and resulting inability of most western economies to support such a large proportion of their population in leisure, the decreasing level of physical strength needed for much of the work that takes place today as technology and machines take over much of the physical work required, the improvement in health levels that enable people to carry on working for much longer, and the changing nature of society that makes retiring a less appealing proposition than it used to be.
Live long and prosper
This is the number one reason for the need to work longer. By traditional standards of retirement, where people generally retired at 65, the increase in life expectancy means that after 25 years or so of education and 40 years of work, people can now expect to spend at least 20 years in retirement. This means that roughly half of a university educated person’s life is spent working. As a result, the wealth generated from that work has to essentially do twice as much work in terms of supporting them – I know they don’t have to cover their childhood costs but in general they will have to cover the next generation’s childhood costs, so from a societal point of view it comes down to the same thing.
Given the amount of living their working life has to support, it has become difficult to see how this can be achieved by working over a mere forty years.
The bionic generation
As technology, and robotics in particular, has improved, a lot of the physical labour involved in the workplace has been removed or diminished so that the physical strength barrier that previously would lead to retirement has now been removed. Although physical strength does decline as one grows older, the impact has been incredibly reduced so that it is now possible for people to do work in their sixties and seventies that would have been beyond someone in their fifties just half a century ago, as the job now involves manipulating machinery rather than actually doing any of the work directly. As this barrier falls, and the cost of supporting machinery drops so that even small businesses can afford it, it enables experienced people to keep doing a job long after the decline in their strength and flexibility would normally have allowed them to do it.
The strides in medicine that have been taken over the last few decades would dumbfound anyone who visited this century from just 100 years in the past. The advances have meant that diseases that were previously debilitating are now more routinely curable, giving the general population a major extension to the part of their lifespan where they are capable of fully functioning.
Both through improvements in health education and more directly in the procedures they can carry out, we have greatly extended the lifespan of the average person. As a result, people feel less ready to give up working when they feel perfectly capable of keeping going. As long as they can earn, and in the absence of a high enough income to live a good lifestyle, they are perfectly happy to continue to work to generate the level of income they feel they need.
Collapse of community
Back in the day of more community-based living, retirement did not mean isolation. Community groups were frequently dominated by the retired who had the time to put into the organisation and its projects. However, modern society is far more individually based and therefore there is a risk, particularly in large urban areas, of having little interaction with the rest of society post-retirement.
There are many people who prefer instead to work on, either at their own job or to change and work in one or more part-time roles that ensure they are still meeting people and interacting. This includes, but is not restricted to, the voluntary sector.
Many people no longer associate happiness with stopping working, which removes one of the most powerful incentives to retire. This is one of the reasons that the raising of the state pension age did not lead to the kind of riots on the streets that one would have expected if the government had decided to do it during the 1980s
What will the future look like?
The result of these forces is likely to be dramatic in their impact on society as we currently know it. The knowledge society has increased the number of people who like their jobs for their own sake rather than merely endure them for the financial recompense associated with them. As a result, we can probably look forward to having a nation that is happier with what it does, rather than a nation of people just suffering through their working years and dreaming of an escape. On the bright side, this should lead to a reduction in the type of mental health issues that can all too frequently be associated with the ‘over the cliff-face’ approach to retirement that takes place at present.
The difference between this view and that of bygone times is that previous visions were always focused on retirement being spent in non-productive activities and generally associated with pleasure. The cruise-ship represented the ultimate destination for many on life’s weary journey or at least some equivalent of it for those who found the idea of being cooped up in a luxurious, floating, geriatric home too much to bear.
But for those who enjoy their work and the challenges it brings, sitting at home trying to solve the Countdown Conundrum in thirty seconds sends a shiver of fear down their spine. For many people, artificial challenges represent a pale shadow of the excitement of real work. The appeal to these people of working on, perhaps in a different role, is a far more attractive option particularly as technology that allows working from home and at convenient times now means that it is possible to structure work around your life instead of having to structure your life around your work.
Flexible work for flexible income
Given this more flexible approach to work in the future, where it remains part of your life but perhaps no longer the dominant part, the financial rewards aren’t necessarily the dominant part and many will be looking to have the extra choice in their own future that comes from having built up a certain degree of financial independence during their earlier working years. Thus our later years could become years when previous investments, such as National Insurance payments and pension savings deliver income streams that augment the income streams coming from one or more part time jobs. They could even augment reduced income from someone’s current job, particularly if they have dropped a grade or two to work in a less stressful position.
Financing the future
The types of products that are currently used by pensioners are quite rigid. Tax effective savings plans are turned into income streams but with restrictions due to the fact that the money was garnered using tax-favoured status. This leaves a lot to be desired as in many cases, the income stream is not flexible and cannot cope with the further changes that people experience as they move through the years. For example, an annuity covers the needs of an individual who lives on for twenty years but pays out whether they need the money or not and will not provide protection for future events such as ill-health, medical expenses, moving into a care home, nor even with simple straightforward ones such as gaining a dependant through marriage or dealing with a separation or divorce.
The issues that tend to cause anxiety for those of more advanced years are based around security of income, need for assistance in independent living, care costs and, for some unknown reason, a legacy to those left behind after death. Those couples who share an income also have issues where one might need care while the other is living independently. Our simplified view of the financial needs of the elderly needs updating and so do the products the financial services sector offers to support them.
What does this new “retired” generation need?
In the next article, I intend to take a look at the types of products that will be suitable for the pensioners who don’t stop working – the un-retired, as HBSC referred to them in a recent report – and see what kind of changes are needed to the current product set that the industry is offering in order to fulfil the needs of this new breed. Financing the type of lifestyle lived by the working pensioner is going to demand a major shift of thinking from the life and pension providers and only those who can adapt their product set to meet the needs of this market will survive.
Part two of this article is now available on the Exaxe blog: http://www.exaxe.com/end-of-retirement-part-two!
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