Addressing financial hardship throughout the life course can improve pension adequacy
Our latest study shows that experiencing financial problems during the early and mid-life course does not necessarily bear negative consequences for one’s pension income in old age. However, a better understanding of the connections between economic wellbeing in earlier and later life helps in shaping better policies for ageing societies.
There are good reasons to expect that experiencing financial hardship before retirement is associated with lower income in retirement. Financial hardship in adult life can be the result of unemployment or low earnings, leading to lower pension accrual. Difficulties in making ends meet can also be a cause for limited possibilities to save for retirement. Moreover, financial problems in early life often tend to persevere across the life course, reducing chances for upward mobility and thereby contributing to accumulating disadvantages.
In our study, recently published in European Societies, we set out to investigate these expectations. We used longitudinal data from the Survey for Health Ageing and Retirement in Europe (SHARE) for 27 countries. For our analysis, we used a question that asks whether the respondent has ever experienced financial hardship and, if yes, from what year to what year? We study respondents who were aged 65 or older and our main outcome variable is total individual pension income.
Occurrence and consequences of financial hardship vary by gender, life-course stage and welfare regime
Around one in four respondents indicated that they had experienced financial hardship at some point during their lives. This percentage was somewhat higher among women (28%) than among men (23%) but also showed large differences between countries. Among Finnish women, for example, the share was close to 38 per cent.
Financial hardship usually does not happen randomly across ages but tends to concentrate in certain stages of the life course. We found that, especially in the Nordic and Continental European countries, the incidence of hardship drastically increases in the early twenties, only to start to decline again after ages 30-35. This is a period of life when many changes typically occur: young adults move out of their parental homes, study, start careers, form partnerships, and have children. All these life course events, alone and in combination, may lead to financial hardship, even if only temporarily.
Our analysis shows a negative association between any occurrence of financial hardship and pension income, but only for men. When we split financial hardship by the life-course stage in which it first occurred, a more mixed picture appears. Among men, financial hardship during youth is associated with higher pension income and hardship during the late career with lower pension income. Among women, financial hardship during their twenties is associated with higher pension income. The duration of financial hardship shows a clear negative association: the longer hardship lasts, the lower one’s pension income.
What do these mixed results mean? At least, it means that it matters in which life-course stage financial hardship occurs and what its possible causes are. For example, financial hardship in one’s twenties can be the result of the process of moving out of the parental home and establishing an independent household. This process might be paired with short spells of financial hardship, but in the long run it can set the stage for having a career and thereby having a higher pension, especially for women.
In contrast, financial distress that starts in one’s late career might be the result of accumulated disadvantages and early exit from the labour market. Leaving the labour market at an age when earnings and pension accrual should be highest can leave a serious dent in one’s pension benefits.
Tackling problems of economic wellbeing in old age requires interventions early on in life
Our study shows that financial hardship is relatively common, but that it often also lasts quite shortly. Although their potential immediate harm should not be downplayed, these short spells of financial hardship are to some extent a natural part of transitions during the life course. The welfare state should enable and support these transitions, especially those that allow young adults to become independent, kick off their working careers and start families. This is, of course, important not only from the perspective of financial security in old age.
More challenging for pensions are the longer spells of hardship, especially in situations where people lack the resources to climb out of them. However, instead of patching up people’s pensions in later life, more efficient policy would be to offer immediate help to recover from these situations.
As societies are ageing, more and more people are depending on pension benefits as their main source of income. At the same time, over the last few decades many countries have introduced pension reforms that tighten the link of pensions with lifetime earnings and increase the role of private saving for income in old age.
Taken together, this could mean that financial hardship experienced throughout the life course will leave a larger impact on the economic wellbeing of a growing part of the population in the future. Therefore, better pensions in the future start with better education, housing, family, health, and labour market policies now.
This blog was first published on the SustAgeable research project’s website.
Read more about the SustAgeable research project (Sustageable.fi).
