Involuntary Retirement: Damaging Effects On Living Standards

More than 40% men who retire before 65 feel they are forced to do so because of ill-health or redundancy. New research by Sarah Smith, published in the March 2006 issue of the Economic Journal, shows that these people are significantly worse off in retirement, measured by their spending on food, than they were before retirement.

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 preretirement

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 wellbeing 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 are able to maintain their preretirement 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, but that those who retire involuntarily early find things much harder.
  • There is a current debate about whether to raise the state pension age (from 65 for men); this research shows that most men leave work before 65, and that many are forced to do so because of ill-health or redundancy. Simply raising the state pension age will not be enough to raise ”effective retirement ages”, and will place further financial hardship on a group who are already finding things hard in retirement.

‘The Retirement-Consumption Puzzle and Involuntary Early Retirement: Evidence from the British Household Panel Survey” by Sarah Smith published in the March 2006 issue of the Economic Journal.

Prof Sarah Smith

University of Bristol

Sarah Smith is Professor of Economics at the University of Bristol and the current Head of Department. She is an elected member of the EEA council/ former elected member of the RES Council. She has previously worked at the Institute for Fiscal Studies, HM Treasury, Financial Services Authority and the London School of Economics.