People who are forced to retire through ill health or redundancy are significantly worse off in retirement than they were in work.
New research by Sarah Smith, to be presented at the British Household Panel Survey 2005 conference at the Institute for Social and Economic Research (ISER) on Saturday 2 July, shows that:
People who retire involuntarily are more likely to find life financially hard than they did pre-retirement.
Their spending on food falls by as much as 10 per cent compared with pre-retirement levels.
Their psychological well-being - measured by such things as how happy they are, whether they feel they play a useful role, whether they are constantly under strain, whether they have problems overcoming difficulties and whether they enjoy day-to-day activities - is also significantly worse.
This experience of retirement is in marked contrast to what happens when retirement is voluntary. Among those who retire voluntarily, food spending is typically maintained at pre-retirement levels, people typically report that they are 'living comfortably' or 'doing alright' and psychological well-being improves.
These findings come from an analysis of the British Household Panel Survey, which tracks the same households over time, and allows a direct comparison of spending and well-being before and after retirement.
These findings have important implications for current government policy:
Looking at what happens to people's financial situation and their spending after retirement is one way of assessing whether people have saved enough for retirement.
The fact that most people who retire voluntarily report that they are 'living comfortably' and 'doing alright' and are able to maintain their pre-retirement level of spending on food, suggests that they are not forced to economise through lack of resources - although average incomes are lower in retirement compared with pre-retirement levels.
This evidence suggests that most current retirees have saved 'enough' - through their employer's pension or through their own private saving.
Those who retire involuntarily find things much harder. This is particularly true for those who retire involuntarily early and have no occupational pension.
This group is more reliant on benefits from the government - whether through incapacity benefit or means-tested benefits - and would be harder hit still by restrictions on the generosity of these benefits.
As part of the current debate on saving more and retiring later, this research highlights a need to think about the group who may be forced to retire earlier than they expected.
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Notes for editors:
Can the Retirement-consumption Puzzle be Resolved? Evidence from the British Household Panel Survey' by Sarah Smith will be presented at the British Household Panel Survey 2005 conference at the Institute for Social and Economic Research (ISER), Essex.
4 July 2005