How wealthy over-50s are making the rest of Britain poorer
The Governor of the Bank of England has warned that a wave of older workers retiring early is one reason why interest rates have had to rise so much.
Some 132,000 people have left the labour force since the start of the pandemic, according to the Bank. Many of these are people in their 50s who have stopped working, not from poor health or caring responsibilities but simply because they can.
Thousands of them will be gardening, entertaining the grandchildren or sipping cocktails on a cruise ship this spring, leaving glaring gaps in Britain’s smaller workforce.
The absence of these workers means companies have to push up wages to compete for employees, adding another factor to the toxic mix of inflationary shocks to the economy.
Such shocks – which also include the energy crisis, Covid, and trade bottlenecks after Brexit – have “made us poorer”, said Andrew Bailey, “manifesting itself in a rise in the prices we have to pay.”
It comes as Britain’s tax burden has hit a post-war high. Discontent is growing as the state takes increasingly more from working people despite sparse improvement to public services.
Some economists believe a lack of financial incentives to work for longer is making early retirement more attractive to high earners.
Higher taxes are certainly not helping to keep older people in work, according to Tom Clougherty, head of tax at the centre-right think-tank the Centre for Policy Studies.
“Paying tax on your income makes work less attractive at the margin and makes leisure more attractive because you're not getting the full financial benefit of the work that you're doing,” he explains.
“Clearly, there will be people who just made that decision and thought ‘I'm working a full week but I'm only keeping half of it after tax, that doesn't seem like a good deal at this point in my life’.”
Some workers on very high incomes were also discouraged by punitive tax rates on pensions that exceed tax thresholds.
“There can be no doubt that the reduction in the lifetime allowance, coupled with the introduction of the tapered annual allowance, have contributed to many people opting to retire to avoid future tax charges,” says Gary Smith of wealth manager Evelyn Partners.
Jeremy Hunt addressed this in his first Budget earlier in March, when he scrapped the lifetime pensions allowance which had meant that pensions exceeding £1.073m were taxed much at a much higher rate. He also raised the annual allowance from £40,000 to £60,000.
However, the changes are only predicted to grow the workforce by an extra 15,000 people over the coming years, making it a very costly policy at £80,000 per head.
Meanwhile, frozen tax thresholds amid strong wage growth will squeeze billions of pounds out of taxpayers, raising an extra £29.3bn in taxes by 2027-28, according to the Office for Budget Responsibility (OBR).
Overall, Britain’s tax burden is projected to rise to a new post-war high by 2027-2028 at 37.7pc, an increase of 4.7 percentage points from before the pandemic.
This is higher than the OBR predicted in November and reflects a higher tax take from income tax, national insurance contributions, corporation tax and capital gains tax.
Underwhelming economic growth and a slow rise in real wages will also create a sense of discouragement, according to Stephen Evans, chief executive of the Learning and Work Institute.
“The economy has stalled for 15 years, and this is why we're paying more taxes and feel like we're getting less. We have to get out of that doom loop,” he says.
The UK’s employment rate remains nearly a percentage point lower than before the pandemic at 75.7pc, making it an outlier among advanced economies.
A smaller labour force is a concern for the Bank of England and the Government because it drives up inflation, as fewer workers means less supply in the economy. This would not be a problem if demand was also shrinking, but early retirees spend largely in the same way they were previously, meaning demand remains unchanged, Bailey has warned.
It is still unclear why there was a sharp increase in people leaving the labour force during and after the pandemic.
Though the number of people who are inactive from long-term sickness has soared to a record high above 2.5m, the Institute for Fiscal Studies has found “lifestyle choices” were the primary driver of the surge in inactivity.
“A large part of this increase in activity during the pandemic has been driven by people who do seem to be taking early retirements,” says Bee Boileau, research economist at the IFS.
“In contrast, do you see that lots of people are getting sicker among the inactive group and saying that their main reason for being out of work is because of long-term ill health. But these people were already out of the workforce for another reason beforehand.”
More than half of the increase in 50- to 69-year-olds leaving the workforce came from people retiring, her research found.
Figures from the Office for National Statistics show that two thirds of people aged 50 to 65 who have stopped working own their homes outright.
Separate research from the Learning and Work Institute shows that people in higher-paying occupations are far more likely to have retired early.
It found that two fifths of managers and senior officials and more than a third of professionals who left the labour market in the last three years took early retirement. Functional managers and directors, earning £57,000 on average, were the largest group of any occupation to retire early. People in lower-paid jobs were more likely to leave for health reasons.
Trying to convince wealthy early retirees to put down the gardening tools or the cocktail glasses and return to work is a fool’s game, according to Tony Wilson of the Institute for Employment Studies.
“Once people retire, most of the time they stay retired. So I don't think there's much we can do,” he adds.
But he believes others are unlikely to follow in as great numbers, which should provide some relief in the longer term. “This is really a kind of a 2021 phenomenon for the most part,” he says.
But even if the surge in people taking early retirement peters out, Britain’s supply problems may be far from over.
“Over the next 17 years, 1.4 million more people will retire than young people will enter the workforce as the baby boomers retire. So regardless of what's happened in the pandemic, we've got this long-term crunch in labour supply,” explains Mr Evans.
"We really need to provide better help for people... who might want to work but can't at the moment. Otherwise, we're going to have these ongoing labour shortages for many years to come."
Mr Hunt announced many measures seeking to do just this in the Budget. But, as Mr Bailey has already warned us, only time will tell how effective those steps will be.