Cllr Chris Whiteside MBE is an economist and member of the Cumbria Pensions Committee; he is also Deputy Chair (political) of the North West region of the Conservative Party.
The principles behind the pensions “triple lock” are as relevant today as when it was introduced, but perceived balance of economic justice between generations has reversed in the intervening years. The policy needs updating.
In a few months, because of the Covid rebound, the triple lock as it currently stands would require the Chancellor to make a huge payment many people will see as unfair and unaffordable.
To scrap the triple lock would be economically and morally wrong, but not reforming it would be a missed opportunity. There will never be a better chance to make changes which are needed. If it’s not reformed this year, sooner or later a future government will have to scrap it altogether because it will become unaffordable.
To explain the need for reform, let’s start with why David Cameron made the promise in the first place, and why it made sense then.
Today many people are concerned that the younger generation have lost out, but in 2010 the generation perceived to have lost out badly in preceding decades was pensioners. Both views are massive generalisations – some pensioners suffer hardship today, some young people did in 2010 – but there were real economic facts justifying both perceptions.
The government whose term was mercifully ending when the “triple lock” promise was made had undermined pensioners from start to finish, treating their savings and investments like a piggy bank it could raid at will.
Gordon Brown’s first budget included a £5 billion a year raid on pension funds which did enormous long-term damage to the stability of pensions. Consequently, as Frank Field, pointed out, Labour inherited the best-funded pensions in Europe and finished among the worst. That wasn’t the only damage Brown inflicted on pensioners.
Brown implemented a hundred tax rises: many of these, particularly massive rises in council tax, impacted disproportionately on pensioners.
Labour added insult to injury with the lowest annual pension rise in history, just 75 pence for a single pensioner.
By 2010 the relative incomes of many pensioners had dramatically failed to keep pace with those of people in work. To stop this Cameron promised basic state pensions would increase each year by whichever was highest of:
- 2.5 per cent (never again a derisory increase like 75p)
- Rate of inflation (protecting the purchasing power of pensions)
- Average increase in wages (never again would pensioners fall further and further behind those in work.)
Each element of that promise looks reasonable: but the whole package was only fair because the pensioners had fallen behind wages and the aim was to help them catch up.
Over a full economic cycle this set up a ratchet guaranteed to improve the relative position of pensioners. If wages and salaries fall behind inflation or drop during a recession, real incomes of the working population will drop but pensioners are protected by the 2.5 per cent minimum increase or the inflation element of the triple lock. When the economy grows again, wages cannot catch up to the previous relative position no matter how fast they increase because of the single-year earnings lock.
However, it isn’t sustainable to permanently guarantee any section of society a relative income which can never get worse but can and ultimately will keep improving. Eventually either political consensus will emerge that the correction has gone far enough, or the policy will become unaffordable. The triple lock may have reached that point.
During 2020 the Covid-19 recession shut down huge chunks of the economy, put millions on furlough, and those in work generally received little or no pay rise, sometimes a pay cut. Average incomes crashed for those of working age.
The state pension did not: the triple lock protected pensioners, exactly as it was meant to.
This year wages recovering from Covid will generate an extreme example of the triple lock ratchet.
Those of working age who were clobbered last year and now experience some recovery won’t see it as a pay rise, but getting back what they lost last year. The triple lock algorithm won’t treat it that way.
Year-on-year figures for average earnings are likely to show a rise of about eight per cent. Under current rules pensioners will also get an eight per cent rise to match the bounce-back from last year’s drop in income which they didn’t suffer. Some of the £3 billion cost of that rise will come from taxes paid by workers who did suffer that drop in income.
Rather than scrapping the triple lock altogether, or the earnings component, we should ask whether there is a fairer way pensions could keep pace with wages.
Instead of basing the earnings component of the pensions lock on the year-on-year change in wages, we should base it on an index of cumulative change in wages. This will still guarantee pensions cannot fall behind earnings, without the ratchet.
Set a base year – the year before the pandemic hit would be a possible choice – for an index of earnings, and a pension index. The earnings component of the triple lock should then require the cumulative change in pensions to be at least as high as the cumulative change in earnings. Pensions cannot be a lower proportion of average earnings than they were in that base year.
The reformed triple lock would guarantee the state pension increases each year by the which highest of
- 2.5 per cent
- Rate of inflation
- Increase necessary to ensure the cumulative state pension index is at least as high as the cumulative earnings index.
If average earnings are up by 25 per cent since the base year, the pension must be at least 25 per cent up on that year. This respects the spirit of the “triple lock” promise,
Here’s how a modified triple look based on an earnings index compares against the current version:
Whatever the Government does about the triple lock will upset someone. I am convinced that putting the earnings lock onto an index rather than year-on-year basis is the fairest, most sustainable option they could go for.