Growth in the self-employed sharpens the policy challenges for pensions and poverty
The growth in self-employment, particularly among older working-age adults, and the corresponding drop in self-employment income has consequences for tackling poverty and ensuring people are providing for their retirement.
Our latest report for Citizens Advice takes a look at one of the more striking labour market changes in the last few years: the large growth in the number of self-employed. The graph shows that there are 500,000 more in 2015 than in 2010, and 910,000 more self-employed people than a decade earlier in 2004-05. 14.5% of all people in work are self-employed, up 1.5 percentage points since before the recession and higher than the previous peak in the 1990s. Along with these higher overall numbers, who makes up the self-employed is also now different. The changing composition of the self-employed has consequences for two areas of policy in particular: pension provision and poverty reduction.
Why has there been this increase? The data suggests that there has been no significant rise in the number of people becoming self-employed; rather that fewer people have stopped being self-employed. This could be due to the health of the economy or could be a more permanent change, or both: the dearth of employee jobs following the recession could have forced people to stay self-employed longer than they would have otherwise, or perhaps technological advances have made self-employment a more desirable way to transition towards retirement.
This net increase in self-employment is changing the face of the self-employed. They are older, more likely to be female, less likely to be working full-time, and more likely to be renting than ten years ago. One of the more striking of these changes is the proportion that are aged 45 or over, which has increased from 51% to 61% of the self-employed since 2004-05. The graph shows how striking the age changes have been.
The increased share of women and part-time workers among the self-employed also partly but not fully explains another of the major trends: the steep decline in real income from self-employment. The median income from self-employment after inflation has fallen from around £300 a week in 2004-05 to £209 a week in 2013-14, a much steeper fall than for employees. In fact, half of all self-employed adults are now paid below the bottom quarter of employees.
Another area examined in the report is pension participation and savings. 64% of families with a self-employed adult have at least some savings, a comparable level to other working families. A relatively high 30% of self-employed families have savings over £8,000. So in terms of savings, self-employed families on average do as well or slightly better than most employee families. Pension participation, however, is a different story. 19% of self-employed men and 11% of self-employed women participated in a pension scheme in 2013-14, compared to over 50% for both male and female employees, as can be seen in the graph. This is a considerable gap. A caveat is that not participating in a pension scheme is not necessarily the same as not having a pension pot, though it is likely the two are related.
What do these findings combined mean for policy? In terms of reducing poverty, three things stand out. The first is the most obvious, which is that the steep drop in real income from self-employment at the same time as self-employment grows implies an increase in the breadth and severity of poverty. The second is that self-employment is more difficult for, or at least, less familiar to policy-makers. For employees, in-work poverty can be addressed at least to some extent by in-work support and increasing the minimum wage, as well as finding ways to incentivise employees to work more hours. For the self-employed, the minimum wage does not apply and working more hours does not necessarily correspond with being paid more. As for in-work support, Universal Credit does not seem favourably designed for the self-employed, given it assumes a level of earnings that a sizeable proportion do not reach. The final reason is that self-employed work has the potential to be more insecure than employee jobs, given the fewer legal protections. This combined with weaker social security for the self-employed is a poor combination, though one more easily resolved by existing policy tools.
The second implication is for pension provision. The fact that there was a large growth in the number of older self-employed people, combined with low pension participation rates and saving rates that do not appear to be large enough to bridge the gap has implications for standard of living in retirement .There are knock on effects for public finances as a backstop. If higher levels of self-employment are here to stay, then some way to encourage higher pension participation is necessary. The decline in self-employment income no doubt makes this more difficult.
These are not new problems, but the growth of self-employment, and signs that there is a structural element to this growth, makes them more important than ever to resolve.