04 May 2017
What to do about the triple lock?
A fairer way to find additional spending.
by Frank O’Nomics
If I came up with a policy that saved as much as £6 billion a year, that could be spent on the NHS, while being both fairer for the young and the poor, would you be inclined to vote for it? The so-called “triple lock” ensures that the state pension increases by the rate of earnings growth, CPI, or 2.5%, whichever is the greater. Given that both earnings growth and inflation have been below 2.5% for some time this has been expensive. £6 billion per annum is the OBR’s estimate of the recent annual cost of the triple lock for pensions yet, as we approach the election, there is no party that is openly advocating its removal. The Labour Party, Lib Dems, and SNP are all committed to maintaining the triple lock, while the Tories appear to be keeping their options open. The current commitment is to keep the triple lock until 2020, but Theresa May has not said whether this will change after the election, other than to make a pledge to continue to raise pensioner incomes.
Away from party politics there is plenty of support for ending the triple lock. The Work and Pensions Committee argues that it is unsustainable and is unfair on younger families. This latter point is taken up by Baroness Altmann, who believes that the triple lock has put pressure on the government to increase the pension age in an effort to control pensions costs. Those costs will rise for reasons other than just the triple lock, with a rise in the proportion of those of a pensionable age to those of working age. This currently runs at about 30%, but is forecast to rise to 39% by 2067 according to the ONS. This gives some additional perspective to the analysis of the historic costs of the triple lock. The OBR estimates show that the government could have saved £6 billion a year if pensions had been linked solely to earnings, or £4 billion if only adjusted by inflation.
There is some debate as to whether the triple lock has yet done its job. It was introduced at a time when the state pension had sunk to its lowest level relative to average earnings (16%). However, a recent study for the Intergenerational Commission shows that a typical pensioner household is £20 per week better off than those of working age (after housing costs), and 25-34 year-olds have lower real incomes than their parents did at the same age. In addition, we should not forget the importance of wealth effects – house prices as a multiple of income have hit record levels (at around 8 times) barring many from any prospect of home ownership. Nevertheless, the National Pensions Convention claims that 1 in 6 pensioners still live below the poverty line. One way of placating the grey vote would be to ensure that all the savings from ending the triple lock are allocated to the NHS and to care provision, or to find ways to ensure that those who have not been claiming some of the pensions credits due to them are helped to do so. In this way the government would stop rewarding the element of the retired community that really don’t need it, while at the same time helping pensioners in poverty.
The key to success may lie in what is chosen to replace the triple lock. This may be a double lock of the higher of earnings or inflation, or a single lock of just one of them. Some suggest a hybrid that is linked to earnings unless inflation is higher, but ensures that increases are reduced in future years to keep the state pension at the same proportion of earnings as it was previously. This fits well with the recommendations of the Institute for Fiscal Studies who suggest that the government decides on the proportion of earnings that it wants the state pension to be, and then sticks to it. Such an approach would be refreshing, and might finally end the debate.
There is an additional issue in that the triple lock is not applied to all pensioners equally. Only £122 of the old basic state pension has a triple lock – Serps rises with prices and pension credits for the poorest only by earnings – while the new state pension, which only the youngest pensioners get, does benefit from the triple lock. What is perhaps an even better proposal for reform comes from former pensions minister, Steve Webb, now of Royal London. He argues that there is a big difference between the income of those who are newly retired (on average around £100 per week) and those who retired 20 years ago. He proposes maintaining the triple lock for those who retired prior to April 2016, but only linking to earnings the pensions of those who have retired since. He calculates that this would save around £3bn per annum by 2028,
The forthcoming election presents an opportunity to abandon an expensive policy at a point when government revenues are about to become hard pressed. If such a move creates a reweighting of policy towards the young and the poor, doesn’t that make sense? Perhaps Mrs May should also question the true risks of upsetting the grey vote. A recent Ipsos Mori poll had 75% of the over-65s favouring her as prime minister, compared to 15% for Mr Corbyn.
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