Does self-employment come at the cost of poverty in old age? A new report examines developments in terms of new forms of work, and implications for pension contributions and benefits. It finds that alternative forms of work are not necessarily excluded from social security coverage and pensions, but that there is a higher risk of falling short in terms of accruing retirement benefits.
There has been much attention in recent years on the “gig economy”, marked by short-term contracts, self-employment and freelance work. The changing nature of work and public pension coverage: Evidence from the US and Europe published by the International Social Security Association’s (ISSA) Technical Commission on Social Security Policy Analysis and Research, examines the rise of non-standard work and how it may affect on pension coverage in Germany, the United Kingdom, and the United States. These are three countries with very different pension systems but that face similar challenges in terms of a long-term response to the growth of self-employment.
Presenting the report at the World Social Security Forum in Brussels in October 2019, Mr Carl Emmerson, Deputy Director at the Institute for Fiscal Studies in the United Kingdom, stressed that “A retired self-employed person in Germany is over 70% more likely to say that they are in financial distress than a retired employee. We also find higher levels of financial distress in both the United Kingdom and the United States amongst the self-employed retirees than the employed population.”
The development of alternative work arrangements
Alternative work arrangements, broadly defined, includes a number of different ways of exchanging labour for payment, including working as an independent contractor, on-call worker, as an employee of a temporary employment agency, as a contingent worker, or as a self-employed person. Despite the headlines, however, the report concludes that actual changes in the prevalence of non-standard work have been modest to date. This is not to say that the issue is not important. In the UK for example, 40 per cent of the labour market is based on self-employment and various forms of temporary employment.
Alternative work arrangements can present a number of advantages, such as flexibility, as well as tax and legal advantages. On the other hand, those who are self-employed may have more precarious working conditions and reduced access to social protection, including pension schemes that are provided through traditional employment.
In the United States, for example, those who are working in non-traditional ways can and do contribute to social security and are eligible for benefits, but on average their earnings are lower, more volatile, and more subject to underreporting than those of people in standard employment. Under the UK pension system, those who are self-employed accrue entitlements broadly similar to those of the employed, but they depend on the level and distribution of employment income, and currently almost 20 per cent of those who are self-employed do not qualify for a state pension. Under the German pension system, which is the oldest formal pension system in the world, those who are self-employed are not covered by the main “pillar” of the public pension system, although they can choose to contribute voluntarily.
Even if non-standard work may give access to social protection and pension schemes, the level of retirement benefits may be lower than for traditional employees. Of the countries studied, this concern is highest for Germany, where self-employment and mini jobs have traditionally not required participation in the pension system. Also in the US and the UK there are concerns that lower and under-reporting of income leads to lower retirement benefits than for traditional employees.
Although the growth in alternative work to date has not been as dramatic as projected, future trends are more difficult to discern. There remains a concern that workers who engage in such work, particularly over much of their career, may be less likely to accumulate pension benefits. According to the report, the self-employed in the UK, the US and Germany accumulate a higher level of financial assets relative to income, perhaps as a means of making up the pension shortfall. The important concern is that reduced pension entitlements leave those who engage in alternative work at higher risk of financial insecurity in retirement.