Raise the retirement age, but understand the implications

Andrew Lilico is Policy Exchange's Chief Economist.

Earlier this month, the Government announced plans to abolish the compulsory retirement age, on which it will consult until October.  With rapidly increasing longevity and changes in the nature of work, the compulsory retirement age has for some time been an anachronism, dating back to an era of manual labour in which life expectancy after retirement was restricted to a few years.  With significant numbers of today’s children expected to live beyond a hundred years, having not even finished their studies until their mid-20s, if the current rules were maintained many people would be retired for longer than they had worked.

Furthermore, compulsory retirement squanders the wisdom and experience of many older workers.  Many 65 year olds today are still healthy, focused, and interested in their work.  Why should they be forced into idleness by rigid and outdated laws?

So, abolition of compulsory retirement is welcome.  However, to work as a concept it will have to be combined with measures that are likely to prove very controversial and that have not, thus far, seen anything like the public debate and discussion they merit.  Specifically, absent compulsory retirement, it will probably be necessary to significantly diminish employment protection for older workers.

Let me explain this paradoxical thought.  Current employment law envisages a particular pattern of the working life: promotion and salary increase as job experience advances, right up to the point of retirement.  For a firm to demote a worker or reduce her salary it requires a good reason, such as a specific failing on her part or her salary falling as part of a company-wide salary reduction.  An employer can pick a specific worker and decide to raise her salary and promote her without any material impediment.  But to specifically target a worker for salary reduction or demotion is likely to lead to an employment tribunal and a claim for constructive dismissal.

But the blunt reality is that, at some stage as we age, our powers begin to decline.  That may be happening at a later age now than before, but it will still come to all of us in the end.  For a while, advances in experience and network connections might more than make up for losses in rapidity and clarity of thought, creativity, ability to work long hours, and so on.  But eventually, if we live long enough, everyone’s productivity declines.

As productivity declines, the most efficient way for a firm to use that worker will change.  When before she was best used as a senior manager, now she might be best used as a salesman or as a project advisor.  Putting matters more straightforwardly, it will become in the firm’s advantage to reduce the employee’s salary and perhaps also demote her in seniority of role.

A compulsory retirement age allows that to be done via the fiction of retirement — the senior manager retires and then is immediately taken on in a new role as (say) a part-time advisor.  But without a compulsory retirement age, how is the firm to persuade a reluctant senior manager to step down?  Many older people might welcome the opportunity to take on more of an advisory role; others will regret the loss of their senior position but recognize that Father Time is catching up.  But some may choose to rage against the dying of the light or simply not recognize the decline in their powers.

If, of course, they make specific mistakes, then employment law already allows for their replacement as it would with any incompetent employee.  But suppose we are not talking about a senior manager that is incompetent or makes any specific mistakes but is, instead, just that little bit less dynamic than an alternative younger candidate for her position?  Without a compulsory retirement age, if she digs in her heels, the employer may find it difficult to remove her.

The consequence is straightforward: for the removal of the compulsory retirement age to work, it must be accompanied by a relaxation of restrictions on demotion or pay cuts for older workers.  Employment law must, instead, recognize a new pattern of the working life, in which salaries and rank do not rise consistently through life but, instead, rise to a peak and then gently decline in the later years.

This is the inevitable corollary of compulsory retirement age abolition.  But will it be uncontroversial?  I doubt it.