loveMONEY election manifesto: scrap the State Pension triple lock
The State Pension triple lock was always meant to be a temporary measure and has already had meaningful impact on pensioner incomes. With the average retired household income higher now than working ones, can we really justify it anymore?
The State Pension ‘triple lock’ has become a key issue ahead of the General Election on 8 June.
Labour, the Liberal Democrats and the SNP have committed to maintaining the triple lock, while the Conservatives have pledged to keep it until 2020 when it will be replaced by a new ‘double lock’.
While we don't choose political sides, we think it needs to go.
What is the triple lock?
The State Pension triple lock is a guarantee that the amount of State Pension paid each year will rise by the higher of inflation (CPI), earnings growth or 2.5%.
The mechanism was announced by the Coalition Government in 2010 and implemented in 2011 to help bolster ailing pensioner incomes. It altered the previous system in place since 2001, which uprated pensions by the typically higher RPI measure of inflation or 2.5%.
Over the last six years the triple lock has been in force the 2.5% guaranteed minimum increase has helped raise pensioner incomes three times, shielding them from stagnant wage growth and boosting pay ahead of rising prices even when inflation was low.
|
|
Rate State Pension was uprated |
Which part of the triple lock kicked in? |
|
April 2011 |
4.6% |
Inflation (RPI)* |
|
April 2012 |
5.2% |
Inflation (CPI) |
|
April 2013 |
2.5% |
Guaranteed minimum |
|
April 2014 |
2.7% |
Inflation (CPI) |
|
April 2015 |
2.5% |
Guaranteed minimum |
|
April 2016 |
2.9% |
Average earnings |
|
April 2017 |
2.5% |
Guaranteed minimum |
*Change of index from RPI to CPI for the inflation part of triple lock was delayed for the State Pension until April 2012 (see 2.33 of the 2010 Budget book if you have a lot of time on your hands)
Between April 2010 and April 2016, the value of the State Pension has been increased by 22.2%, compared to growth in earnings of 7.6% and growth in prices of 12.3% over the same period, according to the Institute for Fiscal Studies (IFS).
Why it needs to go
First off, the triple lock has done its job to improve pensioner incomes.
The guarantee has helped raise the basic State Pension from £97.65 a week in April 2010 to £122.30 a week today. It's also helped boost the new single-tier State Pension since it was introduced in April 2016 from £155.65 to £159.55 a week.
The State Pension was the equivalent of 26% of average earnings in 1979, but without a link to earnings fell to 16% by 2010. Now the State Pension pays the equivalent of 24% of average earnings according to Government figures.
Secondly, the triple lock is a very expensive promise to keep and with people in the UK living longer, keeping it is going to get much tougher.
The Government’s Actuary Department estimates the triple lock promise is adding £6 billion a year to the State Pension bill. If the triple lock was to stay in place beyond 2020 the Office for Budget Responsibility (OBR) estimates it will cost £35 billion in today’s money over the next 40 years after 2020/21.
What’s more the triple lock could also be putting pressure on the Government to keep raising the State Pension age to keep costs down.
Figures from the IFS put together earlier this year showed that the triple lock on a full single-tier pension is projected to be worth 27.5% of average earnings and be available by 69.
But if we were to abandon the triple lock and index it in line with average earnings beyond 2020, the State Pension would be worth 24.2% by 2060 and for the same cost as the triple lock be paid from 67.5 years old.
Finally, the system of protecting pensioner incomes is unfair to other struggling sections of society.
The triple lock is much more generous than the uprating policies for working age benefits, tax credits and child benefit.
A Resolution Foundation report earlier this year found that pensioners are on average £20 a week better off than people of working age, after considering housing costs.
If housing costs were considered, the gap would probably be much bigger, as pensioners usually own their home or have smaller mortgages.
By continuing to offer this deal to pensioners, we are at risk of growing intergenerational unfairness.
What should replace it?
The Tories have pledged to keep the triple lock until 2020 and to replace it with a ‘double lock’ which increases the State Pension in line with the higher of inflation or average earnings and abandons the arbitray 2.5% lock.
We know this system works. It was what was in place between 1974 and 1979, when pension income as measured as a proportion of average earnings was at a more acceptable level. But the very reason this was scrapped in the first place was that it was deemed 'unsustainable'.
A more affordable and a fairer plan would be to link State Pension uprating to either inflation or earnings.
The John Cridland report into the State Pension age earlier this year suggests earnings would be the better of the two.
The report stated: “If further savings are needed to ensure fiscal sustainability, they are more appropriately delivered by moving in the future to uprating the pension by earnings.
“We recommend that the triple lock is withdrawn in the next Parliament. Under our recommended timetable, State Pension spending would be 6.7% of GDP in 2066/67, which is a reduction of 0.3% compared to the principal OBR projection.
"If the triple lock is withdrawn, spending will be further reduced to 5.9% of GDP by 2066/67.”
After 2020 the IFS estimates that linking state pension to earnings would save £15 billion over the next 40 years.
More on loveMONEY:
How to top up your State Pension
Pension advice: when you need it, where to get it and how much it will cost
The joys of getting older: perks, discounts and benefits you can claim
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Comments
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LoveMONEY staff sound like a mean-minded bunch of cruel people. Savings are being eroded by inflation and only produce £2 interest in every £1000 anyway. Millions of pensioners die each year from the cold as they cannot afford heating. If rich pensioners were means-tested then the pension money could go correctly to the poor pensioners in need. We have the same pension levels as Mexican peasants, yet we are the 5th richest country in the world. Shame on LoveMONEY for such ageist attitudes, and shame on the FINANCIAL TERRORISTS who are the bankers and selfish unpatriotic MPs.
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The state pension is not all that poorer pensioners are entitled to. for those who retired before the rate went to £155, there is pension credit. For all there is council tax reduction and housing benefit. - obviously all these 3 are means tested. DWP reports indicate 50% of current pensioners are entitled to one or more of these 3 additional benefits. Pensioners without a employers or private pension are clearly worse off than those who do have such benefits - but what did they do in the years before retirement to address the matter? Those who have worked in the public sector are usually well provided for in retirement compared to most of their private sector peers. Private sector schemes have moved strongly away from Defined Benefit schemes toward the inferior defined contribution schemes over the past 20 years or so, and the discrepancy between private and public sector retirees will become more stark in the future as current employees move into retirement. I've commented elsewhere that many people today have no significant savings. Those that spend to the limits of their income while working may face a difficult retirement - pensions after all are only one way of preparing for retirement. I'm in the fortunate position of having a good employers pension, my home paid off and substantial savings. However, its not because I was a high earner, its because my wife and I adopted sensible policies in relation to money while we were working, didn't borrow money apart from out mortgage, had no credit card debt that wasn't cleared when the bill was received, didn't drink to excess or smoke, and only bought things when we had the money to do so. we also did most things around our home ourselves - no cleaners - and DIY was extensive. We all have choices in life about how we spend our money - some are careful and prudent while others less so. As to the winter fuel allowance we never paid in for this - it was a bribe by Gordon Brown for our votes. Unfortunately giveaways are easy for governments, and then very difficult to withdraw. Certainly the easiest action to take would be to make the allowance taxable. Means testing costs!
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Cutting pensions, will reverberate throughout the economy. With the Tory Government already cutting Benefits its impact is already showing in our shops. Many with reduced turnover and profits. You cannot take money out of the economy without our shops feeling the pinch. The problem is, giving money to the already rich, all they do is save it in Government Bonds. Give it to the already poor and they spend it, keeping our shops alive. How will you fare when your local shops disappear?
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31 March 2019