30 July 2016
- Taking the politics out of pensions policy could start with the Triple Lock
- We must protect pensioner incomes – but a ‘double lock’ is better long-term policy
- Committing to a double lock could reduce need to keep raising state pension age
- Totemic political signals can prove difficult to undo but good policy needs courage
It is vital that the UK Government protects pensioner incomes and ensures pensioners are treated fairly. It is also essential that the State Pension system is affordable, sustainable and works fairly for older and younger generations. Currently, the Government has committed to a policy that will ensure the state pension rises each year by the highest of price inflation, average earnings or 2.5% – the so-called ‘triple lock’. This has increased the State Pension considerably since 2010.
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. Indeed pensioner households are no more likely to be poor than other age groups in today’s Britain.
Triple lock will have fulfilled its purpose: I believe the triple lock will have fulfilled its purpose by 2020. As Pensions Minister, I suggested that the next Parliament should secure those gains, but a triple lock is not optimal for that any more. In fact, in some ways, having the triple lock has been used as an easy symbol for politicians to point at to claim they are looking after pensioners. This can sometimes mean politicians do not believe they need to engage in more serious and in-depth policymaking for the aging population. Such totemic symbols may be politically convenient, but are not a sound substitute for carefully considered policy reform.
Must still protect pensioner incomes with a ‘double lock’: In fact, keeping the triple lock construct beyond the current commitment to 2020 makes little sense to me. It is absolutely right that we protect pensioner incomes, but a ‘double lock’ – with state pension being increased by the higher of the rise in average earnings or inflation – could still achieve that important aim from 2020. By committing to a ‘double lock’, rather than the triple lock, and dropping the promise of increasing state pensions by at least an arbitrary figures of 2.5% even if earnings and prices rise by far less than that, the long-term Government expenditure figures would show billions of pounds lower long-term pension costs.
From 2020 the law only requires uprating by earnings: The Government has only committed to keep the triple lock until 2020. Thereafter, the legal requirement reverts to uprating in line with average earnings. A double lock would give better protection to pensioners from 2020 than is currently required by law. Of course, a double lock as a legal underpin would not prevent any Government in future from deciding to increase state pension by more than this each year, but that could be decided at the time, rather than committing to an arbitrary figure of 2.5% that has no specific relationship to society or the economy.
Triple lock inflates state pension costs for the long-term: 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 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 costs would be significantly more – potentially more than double the cost of just linking to earnings by 2070. By moving to a double lock, billions of pounds could be saved in future pension spending.
A double lock from 2020 is better policy and could prevent need to continue increasing state pension age: Pensioner household incomes, after housing costs, have reached levels that mean they are no worse of, on average, than younger families. It is right to continue to protect pensioners and consolidate their position, so they do not fall behind and year by year a future Government could decide to boost their income further. That would be a political judgment at the time but that might be better policy than committing to continuing to boost pensioner incomes by an arbitrary figure. The right thing to do is to commit to ensure they are protected properly each year relative to the rest of the population and the economy as a whole, but then see if more can be offered in future years at the discretion of the Government of the day.
A double lock could mean forecast state pension costs are lower, leaving less pressure to increase state pension age: If money is saved by using a double lock, this could offset the need to keep increasing state pension age. Reducing the annual uprating can save more money than increasing state pension age itself and there are major disadvantages in continually raising state pension age. Many low earners, people in heavy industrial jobs, those living in particular areas of the country have much lower life expectancy than average. These significant variation in life expectancy mean that continually increasing state pension age will further disadvantage particular groups of society. Given the problems in communicating state pension age rises too, it would be helpful to take the pressure of the need for sharper increases.
Brave political decisions are needed for good policymaking: So I had recommended that the Government should take the brave decision (brave politically, rather than in pure policy terms) to announce that it is considering moving to a double lock from 2020 onwards, as a way of ensuring fairness between generations and managing the ongoing costs of state pension age increases.
Triple lock is totemic political construct that has long-term dangers: The triple lock is a classic example of a political policy decision that is in danger of outlasting its purpose because politicians fear taking difficult decisions. It has also been a useful policy for easily asserting that pensioners are being protected, without carefully considering the long-term as well as the short-term implications and inter-generational aspects.
Political courage in the interests of sensible policy: Keeping commitment to 2.5% rise for ever makes no sense in terms of sound policy: A double lock is much easier to justify than a triple lock policy, with room for discretionary extra increases on an ad hoc basis over time. If our new Government is brave enough, there is an opportunity to signal sensible thinking on pension policy and recognise that the triple lock will have achieved its purpose. To consolidate and protect pensioners we can move to a double lock instead for the future beyond 2020.
The most recent figures on Households Below Average Income, released in June 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532416/households-below-average-income-1994-1995-2014-2015.pdf (p.10 shows the position of pensioner households) 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.