Hamish McRae: Pension reform is one thing - persuading us to work longer is quite another

Pensions are only half the problem. Even the least observant of us will have noticed that there has been a lot of pension stuff around this week, associated with yesterday's Turner report - and rightly so.

Pensions have to be reformed, as Lord Turner has so clearly demonstrated, with some combination of higher savings, a later retirement age and higher taxation on the next generation of working people. The wider the debate, and the earlier we have it, the better able we will be to see the nature of the choices and come to some politically acceptable agreement on how to make them.

But there is another aspect of the pension problem. Even if the country had the optimal pensions system, whatever that is, and in addition individuals had tucked away large savings to boost retirement income, the work still has to be done. People have to be persuaded to stay in the workforce because taking their pensions later eases the funding of their pensions. But they also have to be persuaded to do so because we need people to staff the supermarkets, run the healthcare system, teach the children ... carry out all the activities that society needs.

So the issue for our societies is not only how to provide for people who are not working but how to reshape the world of work so that people are encouraged to carry on contributing in some form to the well-being of the economy.

There is a negative way of expressing this and much of the comment has taken that line: of people being "forced" to work until they are 67 or 69. There is equally a positive way of approaching it, which is to think about ways of making work something that people want to go on doing. Companies that achieve this will win a competitive advantage; countries that do so will be more likely to prosper; and people who are able to carry on working in some form are more likely to have a healthy old age as well as a more prosperous one.

In terms of its basic demographics, the UK is not badly placed by comparison with some other developed countries. On one measure, the proportion of people aged over 60, the UK is "younger" than most European countries, though older than North America (see the left-hand chart). On the other hand it has not managed to achieve the same levels of labour participation as some other rich developed countries, including Switzerland, Canada and the Netherlands (the right-hand chart), which gives us room for improvement.

How? There are two obvious ways of increasing the labour participation rate. One is to get people of the usual working age who are not working to do so. The other is to extend the age range. So getting older people into work is half the solution - but the things that make work more attractive for younger people are probably quite often the things that will also be attractive for older ones.

For example, home-working on screen is an option for mothers with young children at nursery school; but it is also an option for the retired who don't want to travel to work.

This leads to a further point, the extent to which the new communications technologies are changing work practice. In October, the Office for National Statistics reported on a study of teleworking, people who work on screen at home, or in a variety of locations using home as a base. It found that the proportion of teleworkers had doubled in the past eight years to 2.5 million people. In London and the South-east, that is equivalent to more than 10 per cent of the workforce.

Of course, not all jobs can be done on screen but we must surely assume the world is still in the early stages of the communications revolution and that the proportion will carry on increasing for another generation. Figuring out how to use technology to persuade people to stay in the workforce is one of the great challenges society faces.

Not all jobs are white-collar ones. There are still many manual tasks that require a reasonable level of physical activity, even strength. Arguably a higher retirement age unfairly penalises those people in "physical" jobs as opposed to "mental" ones. Those who argue that people ought to enjoy the opportunity to carry on working longer are probably very lucky to have the job they themselves have.

Nor is this just a task for employers. Some companies, most notably the supermarkets, have been very good at recruiting older workers and find they get excellent results. Others have been less successful. But often the problem is not just the mechanics of the job but rather the way financial incentives are structured: for example, the extent to which people lose social security benefits if they carry on working beyond normal retirement age.

One key area will be the extent to which companies are able to buy in services from small businesses and sole traders, rather than generate those in-house. Out of those 2.5 million teleworkers, some 62 per cent are self-employed. This will almost certainly grow and as it does, it will change the nature of the work/retirement debate. For the self-employed there is no particular retirement date as specified by company policy. Nor, for the self-employed, is there that harsh frontier between full-time and part-time employment. You work because you have customers.

What we don't know is at what rate self-employment will grow. Its growth is clearly associated with the communications revolution but I suspect it is a parallel development. It is at any rate quite plausible that, a generation from now, the self-employed will be a quarter of the workforce. That will change the nature of the pensions debate because the whole thrust of the Turner proposals is about people in employment. It would be exaggerating to say the proposals are designed for the world of work now, not the world of work in 30 years' time, but there is some truth in this.

Certainly, the countries that are successful at increasing the proportion of the self-employed will also be successful at increasing the proportion of people in the workforce. Indeed, one of the key ways of increasing the average retirement age is to encourage self-employment. It may even be that the whole idea of a specific date for retirement will be so eroded a generation from now that it will seem as quaint as the archetypal family of the 1950s, with husband, wife (non-working) and two children sitting round the Sunday roast.

One thing is sure. Persuading people to work longer will require both carrots and sticks. A stick is increasing the state pensionable age to 67, 69, whatever. A carrot is making work nicer for the elderly. That will include the growing ranks of self-employed elderly as well as the elderly still in jobs. I don't think the Government has begun to think about this aspect of our changing work patterns and if the Turner report gets its grey cells working on that, it will have done something very useful indeed.