Why might individuals not work longer or move to part-time work?
Editor’s note: This text corresponds to the second instalment of the article by Professor Nicholas Barr for CENIE, “Why don’t we work longer?”. Throughout October we will be publishing the different parts on a weekly basis, within the framework of the activities organised on the occasion of Financial Education Day 2025.
When evaluating an observed outcome – in this case limited options for flexible retirement – it is essential to distinguish whether the outcome is the result of choice or constraint. Below I identify constraints that impede longer working life and, in a subsequent section, the types of policy interventions that help to address them.
Decisions by workers about whether to work beyond earliest pension age are impeded by attitudes, labour-market rigidities and faulty pension design.
Attitudes and preferences
Well-informed preferences. Some workers retire as soon as they are allowed because they can afford to so and/or because they have other activities they wish to pursue (travel, golf, time with grandchildren). To the extent that this is the case there are no grounds for intervention.
Attitudes towards retirement. Some people retire at 65 because they think that that’s when people always retire. But, as noted, the historical reasons for a retirement age of 65 go back to times when life expectancy was much lower. The UK Pensions Commission (2005) illustrates the important point that it is possible (a) to raise earliest pension age while (b) not giving anybody any short-run shocks. In addition, their recommendations made it possible to tell workers that, ‘You will retire later than your parents, but you will still have more years of retirement than your parents.’
Raising pension age is an important signal. The key point, which younger cohorts now increasingly understand, is that pension age is a variable not a parameter. Reinforcing the point that state pension age is a signal is the fact that we are all systematically badly-informed. When asked what ‘old’ means people naturally think of their grandmother. But with rising life expectancy that view goes out of date. In the past, 70 years was old; today many 70-year-olds (and older) are active and productive.
A second helpful change in attitude would be a weaker expectation that earnings will be highest just before retirement. It should not be regarded as unusual for earnings to reach a peak and then decline if a person chooses to downshift (fewer hours of work and/or less stressful work).
Rigidities in labour markets
Lack of part-time options. A widespread problem is the lack of part-time options, caused in part by impediments facing employers, discussed below.
Loss of fringe benefits. Bad design can create labour immobility where a move from full-time employment creates a step drop in fringe benefits. In the USA, for example, the potential loss of health benefits creates a direct disincentive for a worker to change employer or to downshift.
Faulty pension design
Incentives that discourage later retirement.
Some plans offer a tax-free lump sum on retirement. In the face of present bias there is a clear incentive to retire earlier rather than later.
A different problem arises if a plan fails to increase a worker’s initial benefit sufficiently for a delayed start to retirement. In the extreme, someone who continues to work may get no extra pension when they eventually retire. Again, there is a disincentive to continuing work past earliest pension age.
Incentives that discourage workers from seeking part-time work
A literal final-salary plan pretty much kills the idea – if halving working hours and hence pay means halving one’s pension nobody will move to part-time work.
A second impediment is the lack of partial pensions. In Sweden, a worker who reaches earliest pension age can choose to take all of their pension or none, or to take 25%, 50% or 75%. If a worker takes (say) 50% of their pension and continues to work part time, they continue to pay pension contributions on their earnings; when they eventually retire, the second half of their pension is larger both because of the additional contributions and because claimed later. Norway has a similar arrangement. Those countries, however, are outliers. Other countries should follow their example1.
Some firm and industry plans restrict a worker from taking partial retirement while remaining at the same firm.
1 - I tried and failed to persuade the UK government to introduce such an arrangement.
