Commentary: Retirement and Economic Recovery

Abstract

One of the most striking ways in which the policy response to the recent recession differs from earlier practice is in policy towards early retirement. In the 1980s early retirement was seen as a ‘solution’ to high unemployment. In the current circumstances in the UK not only is the policy of raising women’s state pension age continuing, but the new government seems likely to implement proposals it made in opposition for an early increase in the age at which the state pension is paid to men. In addition a number of other countries in Europe have announced plans to increase the state pension age in response to pressures on the public finances induced by the recession. Increasing the age at which people retire can achieve two objectives; it is likely to improve the public finances and it is also likely to increase potential growth for a period and the sustainable level of output permanently. After the shock to output and government budgets induced by the recent financial crisis, both of these can be seen as beneficial. In addition, raising retirement ages appears to be a believable commitment that financial markets will take more seriously than commitments on spending that can be reneged on after the election of a new government.