“I’ll never be able to retire now.” I overheard this familiar refrain while standing in a crowd of thousands of striking university staff marching on parliament in a snow storm. What had brought so many people out on one of the coldest days of the year was a common anxiety – following proposed changes to their pensions scheme – that they would not be able provide for themselves and their loved ones in old age.
One generation ago, 8 million workers had defined benefits pensions. When they retired, this older generation could be sure what their pension would be. Today, the number of people with defined benefits pensions has dwindled to one-fifth of what it was. Now, 5.6 million employees have a defined contribution pension. This younger generation of workers know what they have to put in, but they don’t know what they will get out when they eventually retire.
How did such a radical shift take place? According to the Wharton School’s J Adam Cobb, from the 1980s onwards, companies with impatient owners who only cared about short-term financial returns would cut back workers’ pensions to increase profits. As unions were undermined, bosses faced less opposition and were able to push through more insecure pensions. Now the public sector is under pressure to follow the lead of “best practice” in the corporate sector and push workers on to defined contribution pensions.
Defined contributions pension were made legally possible in the UK by Margaret Thatcher’s government in 1986. Workers were told these new kinds of pensions would give them more individual choice. But individuals proved to be much less economically rational than Thatcher assumed. When given control over their pensions, people tended to make naive financial decisions based on rules of thumb, which led to smaller pension pots. Workers on defined contributions pensions also found themselves at the mercy of the market. If they happened to have the back luck of retiring during a recession, their income was going to be far lower than it might have been. Finally, many employees with defined contributions pensions found their employer was putting much less towards their pensions. According to one analysis, employers spent on average 15% of their earnings on people with defined benefits pensions and just under 3% on people with defined contributions.
That means that while defined benefit workers got on average £7,389 each from their companies for their pension, workers with defined contribution pensions only got £1,071. The upshot is that the mainly older workers on defined pensions will enjoy a significantly more comfortable retirement than the mainly younger workers on defined contributions pensions, who are likely to struggle.
As young people consider their future, many have come to the conclusion that they are never going to be able to retire. A world in which you never stop toiling might appeal to a few workaholics, but is likely to have some disastrous consequences for the rest of us. A lack of robust pensions will mean increased rates of elderly poverty. If older people have to spend their time in paid employment in an attempt to top up meagre pensions, then the army of older volunteers who prop up many communities may start drying up. This could have disastrous knock-on effects for many charities, which rely on older people. Finally, when young people begin to compare their own bleak prospects with the comparatively rosy retirement of their parents or grandparents, they are likely to become resentful. This may make them less willing to support institutions such as the NHS or social care, which elderly people rely upon.
With the prospects of working until death, what options does a young person have now? One thinktank has advised young people to get ready for their retirement now by putting away 18% of their income for their retirement. Sounds wise. But it is also likely to be impossible for those young people who are already struggling with low wages, insecure work, large student debts and astronomical housing costs.
This leaves today’s young people with four options. The first is exit. Many skilled young people have realised that things are getting worse in the British workplace, and have decided to head for more attractive places such as Australia – which also happens to have one of the world’s best pensions systems. The second option is voice. Some people have been challenging changes to their pensions by speaking out or even going on strike. The third option is loyalty. This involves burying your head in the sand and hoping that your employer will have your best interests at heart and something will work out in the future. The final option is neglect. If you don’t think there is the possibility of retiring in the future, some workers ask, then why put any effort into working now? Opting for neglect is quite simply – you go to work, switch on the computer and then spend your days doing things that any retired person would do: read the newspaper, fill in the crossword, chat with acquaintances over coffee and biscuits. This kind of “empty labour” is increasingly common in many organisations. As the prospect of a real retirement begins to fade, it is likely unofficial semi-retirements will become more popular. If this happens, workplaces will become like clandestine retirement villages for the working young.