Triple lock state pensions
6 November 2016
State Pension should move to a double lock from 2020 – 2.5% guaranteed rises make no sense
- Triple lock was introduced for political reasons but 2.5% inflates long-term costs
- Double lock can protect pensioners properly against rises in earnings or prices
- Must not increase means-testing of State Pension as that would undermine private saving
The State Pension triple lock is promised until 2020 – after that, the law only requires earnings increases. However, because the triple lock is currently in place, promising to increase parts of the state pension by the best of rises in prices, earnings, or 2.5%, the OBR official long-term forecasts for state pensions spending assume the triple lock remains in place for ever. This adds hugely to forecast costs.
Triple lock has been used by politicians and Government to cover up pension policy failures: I discovered, as Pensions Minister, that when people raised problems about any aspect of pensions policy, the official reply was that the Government had the triple lock. That was supposed to be the catch-all phrase that proved the Government was unquestionably looking after pensioners properly.
In fact triple lock only applies to selected parts of the State Pension, not all of it: The triple lock has, of course, done a good job in many ways, but it applies only to the basic and new State Pension levels, and not to other pensions and pensioner benefits. State Second Pension, Earnings Related State Pension, disability, war veterans and widows benefits, carers’ benefits are all only linked to prices. In fact, these pensions were frozen last year and had no rises at all. Pension credit is only linked to earnings (although the Government has in fact increased it by more than earnings in most years recently).
We must protect pensioners but also consider inter-generational fairness: My position is that we must protect pensioner incomes. The triple lock has fulfilled a useful purpose in boosting the level of the state pension, but a double lock for the long-term would offer pensioners proper ongoing protection, better than earnings or prices alone, without the commitment to a 2.5% figure that is unrelated to the economy or society. Government needs to consider inter-generational fairness and long-term costs.
2.5% is an arbitrary number: The triple lock itself is really a political construct. The 2.5% makes no economic or social sense. If Government believes the state pension should be brought up to a higher level, then it can consider each year how much extra to increase it beyond prices or earnings, but without committing to an arbitrary number.
As Pensions Minister I suggested a double lock from 2020 onwards: Last year, as Pensions Minister, I proposed that Government should commit to moving to a double lock after 2020. Currently, the law only requires rises in line with earnings, but using a ‘double lock’ would ensure the state pension rises in line with either earnings or prices each year, to protect pensioners against future rises in prices or national earnings levels.
Double lock protects pensions relative to the economy and society, better than just earnings: A double lock would guarantee state pensions would not fall behind the cost of living or the rise in average earnings, and would protect pensioners relative the rest of the economy and society. This would give pensioners better protection than other groups, which is right, but it would not ‘bake in’ the 2.5% figure that is not related to any economic or societal yardstick.
Nothing to stop a future Government giving more than 2.5% or more year by year: The double lock does not preclude higher rises if the Government of the day wants to offer more in any particular future year. But those rises can be decided at the time, rather than committing to an arbitrary number that has no relation to the economy or society.
Double lock helps reduce long-term forecast cost of state pension in national accounts: For the purposes of forecasting long-term state pension costs, the triple lock apparently must be assumed to stay in place until there is an announced policy change. The Office for Budget Responsibility (OBR), therefore uses the triple lock for its forecasts, even though legally state pension increases revert to earnings from 2020. A double lock would help take some pressure off the need to increase the state pension age as much as might otherwise be the case because the forecast rise in state pension costs would be lower than if we assume the triple lock stays in place in perpetuity.
Keeping the 2.5% in long-term forecasts could double expected state pension costs: A Report produced by the Government Actuary’s Department (GAD) last year (published but then hastily withdrawn one day later) suggested that the cost of the triple lock has been about £6bn a year. The GAD Report also said the cost of the triple lock could well be ‘materially higher’ in future, especially if earnings and price inflation stay low for a longer time. On its most likely scenarios, keeping the triple lock could add around 10% to spending on state pensions by 2040, but in a deflationary scenario the triple lock could more than double the cost of just linking to earnings by 2070.
Since 2010, pensioner incomes have been boosted significantly: Leaving pensioners in poverty is unacceptable, yet until a few years ago that was the fate of too many or our country’s elderly people. In 2008, the Basic State Pension had sunk to the lowest level relative to average earnings for decades. However, since 2010 the incomes of the UK’s 13 million pensioners are now more than £10 a week higher than they would have been if the state pension had only been linked to average earnings. Recent figures on Households Below Average Income, released in June 2016 show that the percentage of pensioner households living in poverty has fallen from just under 30% in 2002/03, to 13% in 2014/15. Pensioners are at lower risk of living in both relative and absolute low income after housing costs than the overall UK population – see page 10 of the Report: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532416/households-below-average-income-1994-1995-2014-2015.pdf
Government must not listen to calls to increase means-testing – it has to be safe to build private savings: The vast majority of pensioners are not well-off. The majority do not have high incomes and the State Pension itself is low – even the new State Pension is only around £8,000 a year. Indeed, the state pension is being reduced for future generations. It is therefore vital that people have private savings as well, or they will have relatively little to live on for the rest of their lives. Having just introduced the new flat-rate state pension, with the state providing just a basic level of income and encouraging people to save privately on top, more pensioner means-testing would be disastrous. It may sounds appealing to say that more help should be given to the poorest pensioners, but that is really saying that those who have saved for their future should be penalised. The long-term result of such policies will ensure more future pensioners will be poor, whereas we need a system in which saving for retirement is the right thing to do. A fair, basic state pension and encouragement of private saving is the best way to manage state pensions for the long-term. Moving to a double lock would help set a stable and fairer base for the long-term too.