In defence of the state pension triple lock – UK in a Changing Europe

Jonathan Portes summarises his recent article in Political Quarterly on the pension triple lock, arguing that the much-maligned policy has in fact been a success.

In the 1990s, well over a quarter of Britains pensioners lived in poverty. It is now fewer than 1 in 5, while the number of relatively well-off pensioners has risen sharply. Meanwhile, spending on pensions has risen from just under 5% of GDP to about 5.5%, while working age benefit spending has fallen by a similar amount. More broadly, a growing proportion of state spending benefits the elderly, with NHS spending growing much faster than that on education. .

This has focused attention on the triple lock which currently governs the uprating of the basic state pension. Introduced in 2011, it provides that the pension should rise each year in line with earnings, prices, or by 2.5%, whichever is higher. The impact of this has been that the pension has risen by a little more than 10% compared to either prices or earnings since its introduction.

This year the triple lock will again result in an above inflation rise, at a net fiscal cost of up to 2 billion, leading to renewed calls for the triple lock to be ended or scaled back. Politicians remain nervous: neither the government nor the opposition has been prepared to endorse it wholeheartedly or commit to reform.

Criticism of the triple lock has several dimensions:

While there is some truth in these criticisms, they largely miss the point. The cancellation of the earnings link by the Thatcher government meant that the value of the state pension fell from a quarter to a sixth of average earnings by the early 2000s. New Labours response was to address pensioner poverty with more generous means-tested benefits rather than boosting the basic pension. Meanwhile, tighter regulation, lower long-term interest rates and higher taxes led to a progressive collapse in the provision of final salary pension schemes in the private sector, only partially if at all replaced by much less generous defined contribution schemes.

The Pensions Commission, established in 2003, was a response to this collapse. Its key insight was that current policy and existing trends would mean that by the mid-2030s, about two-thirds of all pensioners would be claiming means-tested benefits. Benefit spending would soar. Moreover, this would in turn reduce private pension income and coverage, because of the resulting disincentives to save.

So when the Commission recommended the restoring of the earnings link, in combination with the new system of auto-enrolment into workplace pensions, and progressive rises in the state pension age, the objective was to rebalance the system. First, from a state system that built in an ever-growing reliance on means-tested benefits, back towards one where the universal basic state pension was the key pillar for most pensioners; and second, from a private pension system that provided well for a shrinking minority of public sector (and some very well-paid private sector ones) to one that provided a meaningful supplement to the basic pension. The proposals were a package, and, commanding bipartisan support, the key elements were accepted by the Labour government and implemented and, in the case of the triple lock, supplemented by the Coalition.

Two decades on it is difficult to see the results as anything other than a remarkable success. Pensioner poverty has fallen sharply. Meanwhile, about 11 million people are enrolled in workplace pensions; this has increased future projections of pensioner incomes, and reduced the level of undersaving.

So can we say job done and abandon the triple lock? In short, no. While comparing pension provision across countries is fiendishly difficult, the level of the basic state pension is still relatively low in the UK. Thats not problematic if, and only if, we can continue to build up private provision for most future pensioners. The Pensions Commission analysis that this requires a basic pension at a reasonable level, relative to earnings remains valid. Its hard to believe the right level is below 25%.

And, despite auto-enrolment, the need for the basic pension as a floor for retirement incomes is likely to increase, not decrease; the rapid decline of defined benefit schemes in the private sector means that many middle-income earners will see very sharp drops in income when they retire.

Its true that a rise in the basic pension benefits millionaires. But state pension spending makes up a substantially greater fraction of the incomes of poor and middle-income pensioners. And pensioners with substantial private pension and investment income pay income tax at their marginal rate on any state pension increase. Overall, increasing the state pension is relatively progressive.

And further targeting spending has drawbacks. It requires more means-testing, and that in turn impacts on incentives to save among those on lower and middle incomes. Meanwhile, while it is true that benefit cuts have increased poverty and deprivation for working-age people on low incomes, especially the disabled and those with larger families, this is overwhelmingly an issue of inequality within generations, not between them, as the chart below shows. The UKs unequal society is everything to do with socio-economic status and other structural inequalities like gender and ethnicity and very little to do with age.

Complaints about millionaire pensioners in valuable houses are not misplaced. But the issue here is the perpetuation and exacerbation of inequality not between generations but within them, as the children of those with large housing wealth will benefit at the expense of those unlucky enough not to have well-off parents.

Finally, while demographic pressures are very real, pension spending is not the only, nor even the main component. And the primary issue here is not how to restrict such spending, but how it should be financed and managed, whether through the state or privately.

Its true that there is no logic to uprating by the higher of earnings and prices. Theres a case, when and if the pension to earnings ratio has achieved a level that meets the objectives set out above, for returning to a simple earnings link.

However, in the meantime, a clear political commitment, even if suboptimal, has considerable advantages: it seems highly unlikely that the basic pension would have survived the austerity years unscathed without it. The triple lock isnt perfect; but it has boosted pensioner incomes and helped make the broader UK pension system more sustainable.

By Professor Jonathan Portes, Senior Fellow, UK in a Changing Europe.

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In defence of the state pension triple lock - UK in a Changing Europe