The Government must accelerate the introduction of a later retirement age and urgently reform labour market regulations to enable people to work longer, the Institute of Economic Affairs (IEA) has said.

According to the organisation's research, there is a "marked decline" in the employment rate of older-middle-aged people, and under current policies, state pension provision paid to those who retire before state pension age represents a "ticking time bomb" for the public purse.

The IEA said that Government commitments to increase pension expenditure in real terms are both "unaffordable and irresponsible" and have instead made ten policy recommendations to ease the situation.

Aside from accelerating the rise in retirement age, the IEA also recommended that the state pension should be replaced by compulsory private pension provision.

IEA said that this system has worked successfully in Australia, where the reforms saw employers put aside at least 9% of employees' pre-tax earnings into a personal fund, and under these arrangements, individuals who choose to retire later benefit financially.

Professor Philip Booth, IEA editorial and programme director, said: "The Government needs to wake up to the reality of the long-term state of the public finances. People retire earlier on average today than they did in the 1960s despite huge improvements in life expectancy.

"People should have both the opportunity and incentive to continue some form of paid work into older age. Policymakers must urgently implement a coherent package of reforms, including a more rapid increase in the retirement age and a substantial reduction in employment protection legislation which is especially damaging to older people."

First published 09.01.2014

monique_simpson@wilmington.co.uk