Picking the lock
Despite calls to scrap the 'triple lock', the chancellor has promised to maintain above-inflation increases to the State Pension, for now.
“I can confirm today that, despite the fiscal pressures, we will… meet our pledge to our country’s pensioners through the triple lock,” announced Philip Hammond during his Autumn Statement last week.
However, the new chancellor has not extended the promise to beyond 2020, raising the prospect of the triple lock being axed after this Parliament.
The triple lock was introduced by the coalition government in 2010 to ensure annual increases in the State Pension by the higher of the growth in average earnings, the Consumer Price Index (CPI), or 2.5%. However, it proves exceptionally costly during periods of low inflation and low earnings growth – exactly the conditions we have witnessed over recent years.
The cost of guaranteeing steep rises to the State Pension only serves to create a drain on the public finances at a time when the government is making controversial cuts to other areas of the welfare bill. The total amount spent on the State Pension this year is estimated to be £91.5 billion, but this is expected to rocket to £107.5 billion in five years’ time1.
Pensioners have been protected from public spending cuts so, at a time of fragile public finances and stagnating wage growth, critics claim that there is a moral and financial case to scrap it.
Steven Crabb, Conservative MP and former work and pensions secretary, joins a growing list of current and former politicians who are calling for the government to abandon the State Pension promise. Crabb suggests annual rises should be limited to 1.5%, while former minister of state for pensions, Baroness Altman, has suggested ignoring the 2.5% clause and moving to a ‘double lock’.
“It is morally the right thing now to look at whether we can achieve a fairer spread of welfare spending so that working-age families, younger people, also get a fair crack at society,” said Crabb.
Frank Field MP, also agrees that welfare spending is now unfairly tilted towards older generations.
“The welfare state is underpinned by an implicit intergenerational contract. Each generation is supported in retirement by their in-work successors. This is supported by all age groups, but a combination of factors has sent the balance out of kilter. It is now the working young and their children who face the daunting challenge of getting on in an economy skewed against them,” he said.
“Great strides have been made against the scourge of pensioner poverty and the new State Pension is at a level to provide an effective minimum income and encourage personal saving. It is time for the triple lock to be shelved.”
The Work and Pensions Committee, which Field chairs, is calling for political consensus on a new earnings link for the State Pension before the next general election.
How pensions might be adjusted after 2020 will be a major political issue at a time when benefits for younger generations, including tax credits and local housing allowance, will have been frozen for four years. Any attempts to scrap pensioner benefits will inevitably be met with resistance by a politically influential grey vote.
“What we need to spend the next three years doing is explaining very carefully what the fiscal impact…will be arising from continuing with the triple lock throughout the next Parliament and seeing whether actually we can achieve some kind of consensus in society about changing it,” said Crabb.
Perhaps it is not surprising that the government is holding off making unpopular decisions, especially as it tries to rebuild support ahead of EU negotiations. But if the government is serious about trimming the welfare budget and returning the UK to surplus sometime in the 2020s, then it is questionable whether the triple lock could be maintained in its current form beyond the next general election.
Put simply, those who reduce their reliance on the state and build a sufficient pension pot from earnings will have the best chance of securing a decent income when they retire.
1 Office for Budget Responsibility, November 2016