The UK’s pension triple lock has only been in place for 15 years. But it’s done the job it was brought in to do, and now it should be scrapped.
So the prime minister is right to want to change it. Because while it’s been widely treated as politically untouchable, the triple lock is very expensive.
That’s not to say it was unnecessary.
At the time that it was introduced in 2011 (by the Conservative-led coalition) to address the problem of pensioner poverty, the state pension was equivalent to only a sixth of national average earnings.
To reverse the decline of the pension relative to earnings, the triple lock mechanism meant that every year, state pensions would rise by whichever is the greatest of three measures: 2.5%, the rate of price inflation, or average earnings growth.
The overall idea was to reduce poverty and ensure that pensioners benefited from rising prosperity, if and when the economy grew.
Individually, those measures were introduced for slightly different reasons. Increasing state pensions in line with price inflation for example, protects the buying power of the pension.
This is important because retired households may have few – if any – ways of generating extra income, making them particularly vulnerable to price rises. If the price of food rockets, pensions need to keep up.
Increasing pensions in line with average national earnings enables pensioners to share in rising prosperity when the economy grows. Without such a link, retired households would gradually become less well off relative to the working age population.
But the 2.5% element of the triple lock has no economic basis. It was introduced to mean that even in periods of low inflation, and low growth, pensioners would see some rise in their income. (In 2000, when state pensions were increasing only with prices, the annual pension rise that year was just 75p a week, an amount that was widely considered derisory).
Andy Burnham has pledged to adjust the triple lock from 2030 (if he is re-elected as prime minister) to reduce pension costs and release funding for a new social care system.
His reformed triple lock proposal looks complex but is trying to avoid past pitfalls in state pension policy.
His adjusted triple lock quite neatly maintains a link with earnings while avoiding the high cost that in the past had led to the abolition of the earnings link altogether.
Before the 1979 Thatcher government, the state pension was increased annually by the higher of earnings and prices (a double lock) and at its peak was equivalent to 26% of average full-time earnings in the working population.
Between 1982 and 2002, the state pension rose annually just with price inflation, with the relative value of the pension falling to 16% of average full-time earnings.
The current triple lock emerged in 2011 when the coalition government followed through on a manifesto pledge to restore the earnings link to pensions.
In 2010, then secretary of state for work and pensions, Iain Duncan Smith, said the triple lock was necessary after “years of neglect and inaction”. He added: “The value of the state pension has been eroded, leaving millions in poverty.”
In fact, the proportion of pensioners living in relative poverty (defined as having less than 60% of the median household income left after taxes and housing costs) had, by 2010, fallen substantially from 29% in the late-1990s and stood at 14% in 2010. It remains at that level today.
Pensioned off
The distinctive feature of double and triple locks is that they ratchet the pension up each year by the most generous amount. This accelerates the growth of the pension and can enable relatively low state pensions to catch up with working household incomes.
But these policies are expensive, because they benefit all pensioners regardless of income or need. There are still some pensioners in poverty but proportionately no more than the working population, and the new state pension is now around a third of average earnings.
Also, as evidence from the Institute for Fiscal Studies shows, increasing the state pension may reduce low-income pensioner household’s eligibility for means-tested benefits, leaving them no better off overall. Other policies, such as the introduction of pension credit from 2002, have had a greater impact on reducing pensioner poverty.
Burnham’s proposal is to revert to a double lock from 2030 with the state pension increasing each year by the greater of inflation or 2.5%. Alongside the annual increases, the value of the pension will be tested against the growth of average earnings since 2030 and, if the state pension over the total period has risen by less than earnings, there will be an additional top up.
According to my calculations, if Burnham’s adjusted triple lock had applied from 2016, the current flat-rate pension would have been £229.48 a week which is around 5% less than the actual rate of £241.30.
The proposed new system is complex, but aims to combine inflation-protection and pensioners benefiting from economic growth while avoiding derisory increases in any one year – and delivering significant and necessary savings to the UK economy over the long term.
Jonquil Lowe, Visiting Academic, The Open University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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