The problem is that for the vast majority of people to be psychologically healthy they must have a job. This isn't a societal decision, it's a reality about how humans are.
The alternative is like feeding an animal instead of letting it live the lifestyle it's adapted for. That helps it in the moment but over time its capacities atrophy and it ends up weakened, twisted and harmed with nothing to spend its natural instincts on.
They must have something interesting to do. It doesn't have to be a job.
The ideal society is one where humans only do things that they actually enjoy doing, whatever that is, and automation does the rest. Any human being forced to perform labor not because they want to, but because they need to do so to survive, should be considered a blight on the honor of our species.
I would wager that more jobs accelerate psychological and physiological issues than, say, volunteering or unemployment with active community engagement do. At the very least, the psychological benefits of unemployment are objectively an incidental side-effect of its actual purpose, which is labor for a profitable enterprise. That is to say that employment is still "functional" if it generates that labor even while destroying someone's psychological health. If that health is paramount, the structure of employment probably needs to change in order to privilege health over productivity, even to productivity's detriment. Otherwise, the vast majority of people would be better off with some other institution.
This viewpoint seems to be at odds with the well documented human phenomenon of "retirement"
> The problem is that for the vast majority of people to be psychologically healthy they must have a job. This isn't a societal decision, it's a reality about how humans are.
The "job" can be things like volunteering, artwork, finding a cause, inventing, raising children, teaching...
Work can be subsidized and based around personal interest and achieve the "psychologically healthy" aspect that you describe.