Ros Altmann is right: It’s time to scrap the state pension triple-lock
2 August 2016
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As with many contemporary policy debates, the furore over the state pension triple-lock has its roots with Gordon Brown. Back in 1999, when Brown was chancellor, the state pension was increased by 75p per week. “Derisory”, claimed pensioner groups. Only “enough to buy a packet of peanuts”, bemoaned national newspapers. Scarred by the backlash, political debate on the state pension has been paralysed into confusion and grandstanding ever since.
In fact, Brown’s apparently small rise made perfect economic sense given the government’s aims. The rationale for uprating was to protect pensioners’ purchasing power, and RPI inflation that year had been just 1.1 per cent. In other words, the aim of increasing the amount paid each year was not to allow pensioners to buy more peanuts, as the newspapers implied. It was to keep the real value of the basic state pension constant, which was achieved.
One could argue, of course, that the state pension should have been linked to earnings growth, so that pensioners’ income levels relative to their working age peers remained steady. But to link pension increases to whichever of these variables is higher each year has little logic; to further link to the higher of these or 2.5 per cent (as the so-called “triple lock” now does) is utterly absurd.
In essence, this policy (introduced in 2010) guarantees ever-increasing spending, and over long periods de-links this spending from the health of the economy and the ability of working age taxpayers to finance it. It is particularly costly during periods when inflation and wage growth are weak (as has recently been the case), and is estimated to have cost £6bn per year already relative to if the state pension had been increased in line with earnings. To entrench such a ratchet linked to unknown variables with an ageing population is insanity.
Former pensions minister Ros Altmann’s call for the triple-lock to be abolished over the weekend is therefore welcome, and all the more powerful for the source of the criticism. Altmann also points out that the triple-lock has become so totemic as the offering to the elderly that criticisms of other policy areas which affect the old (such as social care provision) are deflected by celebrating the triple-lock’s achievement on incomes.
Unwittingly, whenever ministers highlight this, they are indicating the opportunity cost of such an offering: spending more on increasing the value of the pension in today’s environment means less money for other things, such as social care. But defenders of the triple-lock, like former minister Steve Webb and the charity Age UK, say instead that it is needed to make up for years of under-indexation relative to earnings, and given the low level of the value of the pension relative to other countries.
We used to have a less generous state pension because we once had extensive and high-quality private pension provision, of course. But, that aside, Webb’s argument makes a fundamental category error – confusing a level of the pension with a mechanism for how it grows.
If the government thinks the value of the state pension should be increased, it should set an explicit and signposted target for what it should be, to be achieved by a certain date. From then on, the pension could be pegged either to price level increases (to protect real incomes), or earnings growth (to protect pensioners’ relative incomes), whichever is the preferred aim of policy.
Using the triple-lock to achieve this “level target” is an utterly bizarre approach given it is driven by various variables. If inflation, for example, was higher than both 2.5 per cent and earnings growth every year for a decade, the real value of the pension would be protected, but no increase in the real value of the pension (the supposed aim of Webb and others) would be achieved.
Those who support the triple-lock on the basis that the state pension is not generous enough should therefore be challenged to say what they think the level should be and indicate when we can replace this mechanism with something that makes sense. This is important, because right now the triple-lock is fuelling both confusion about what the state pension is there to achieve and a sense of entitlement that pensioners should enjoy an ever-more generous income from government.
Ryan Bourne is the IEA’s Head of Public Policy and Director of the Paragon Initiative. This article was first published in City AM.
In fact, Brown’s apparently small rise made perfect economic sense given the government’s aims. The rationale for uprating was to protect pensioners’ purchasing power, and RPI inflation that year had been just 1.1 per cent. In other words, the aim of increasing the amount paid each year was not to allow pensioners to buy more peanuts, as the newspapers implied. It was to keep the real value of the basic state pension constant, which was achieved.
One could argue, of course, that the state pension should have been linked to earnings growth, so that pensioners’ income levels relative to their working age peers remained steady. But to link pension increases to whichever of these variables is higher each year has little logic; to further link to the higher of these or 2.5 per cent (as the so-called “triple lock” now does) is utterly absurd.
In essence, this policy (introduced in 2010) guarantees ever-increasing spending, and over long periods de-links this spending from the health of the economy and the ability of working age taxpayers to finance it. It is particularly costly during periods when inflation and wage growth are weak (as has recently been the case), and is estimated to have cost £6bn per year already relative to if the state pension had been increased in line with earnings. To entrench such a ratchet linked to unknown variables with an ageing population is insanity.
Former pensions minister Ros Altmann’s call for the triple-lock to be abolished over the weekend is therefore welcome, and all the more powerful for the source of the criticism. Altmann also points out that the triple-lock has become so totemic as the offering to the elderly that criticisms of other policy areas which affect the old (such as social care provision) are deflected by celebrating the triple-lock’s achievement on incomes.
Unwittingly, whenever ministers highlight this, they are indicating the opportunity cost of such an offering: spending more on increasing the value of the pension in today’s environment means less money for other things, such as social care. But defenders of the triple-lock, like former minister Steve Webb and the charity Age UK, say instead that it is needed to make up for years of under-indexation relative to earnings, and given the low level of the value of the pension relative to other countries.
We used to have a less generous state pension because we once had extensive and high-quality private pension provision, of course. But, that aside, Webb’s argument makes a fundamental category error – confusing a level of the pension with a mechanism for how it grows.
If the government thinks the value of the state pension should be increased, it should set an explicit and signposted target for what it should be, to be achieved by a certain date. From then on, the pension could be pegged either to price level increases (to protect real incomes), or earnings growth (to protect pensioners’ relative incomes), whichever is the preferred aim of policy.
Using the triple-lock to achieve this “level target” is an utterly bizarre approach given it is driven by various variables. If inflation, for example, was higher than both 2.5 per cent and earnings growth every year for a decade, the real value of the pension would be protected, but no increase in the real value of the pension (the supposed aim of Webb and others) would be achieved.
Those who support the triple-lock on the basis that the state pension is not generous enough should therefore be challenged to say what they think the level should be and indicate when we can replace this mechanism with something that makes sense. This is important, because right now the triple-lock is fuelling both confusion about what the state pension is there to achieve and a sense of entitlement that pensioners should enjoy an ever-more generous income from government.
Ryan Bourne is the IEA’s Head of Public Policy and Director of the Paragon Initiative. This article was first published in City AM.
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