Work until 70 and beyond if you want a decent pension

Study finds we must save more or work longer to match the income of today's retirees, writes Sean O'Grady

British workers are living beyond their means and will have to save harder or postpone their retirement for at least five years if they are to enjoy the standard of living enjoyed by today's pensioners.

The warning comes in research conducted by Martin Weale and Ehsan Khoman of the National Institute for Economic and Social Research for the Royal Economic Society's conference today. They conclude: "Working five years longer is inadequate to make the current consumption pattern affordable to today's young adults."

Being chained to the desk until the age of 70 and beyond may therefore be unpleasant but inevitable.

The UK has long had a neglectful attitude to savings, with an economy traditionally driven by high consumption often funded by large levels of debt.

Even our homes, regarded as the primary store of wealth by Britons, have increasingly been used as "cash machines", with more and more equity withdrawn at relatively young ages to fund purchases of cars, holidays and the like rather than left for later to fund retirement plans. Indeed at the peak of the boom, the UK's savings rate actually turned negative – an unsustainable position.

Share prices and house values have fallen by around 40 per cent and 20 per cent since their peaks, destroying about £2 trillion of personal wealth since the recession began, or £40,000 for every adult in the nation.

Given that, the need to save even harder is underlined. Savings levels have recently increased, with evidence that individuals are trying to pay off mortgages and credit card debts as quickly as they can, perhaps for fear of losing their jobs. If so they may merely be keeping up with the declining value of their assets.

Even taking into account the still substantial wealth of the British population locked up in property, shares and various pension plans, the economists believe today's young and middle aged workers will soon be faced with uncomfortable choices – if they are not simply to place a very heavy burden on succeeding generations.

"Consumption levels of both the young and the average member of the population are substantially above what can be afforded if each group pays its own way," said the report.

Looking at similar, though less serious situations in Spain, Italy and France, the report's authors add: "The fact is that none of the four countries studied can afford to carry on as they are."

Other factors are at work, too. While we are living longer, which extends our need for retirement income, an increasing portion of that old age is being spent in relatively poor health, thus restricting the ability of many over the age of 70 to carry on working – even if they need to in economic terms. It also implies a short, if happy, retirement.

British workers are also slightly younger on average than their European counterparts, and earn a higher proportion of their total lifetime income at the beginning of their working lives.

This means they ought to save more when they are in their 20s than later, though those in this age group are the worst savers of all, often bogged down by graduate loans, student overdrafts and the costs of buying their own home.

Seen in that context, the credit crunch is merely the market's way of telling us the party's over, that we may have to wait longer for that new car or bigger house, and that the time has come to open an ISA.