Philip Hammond, the Chancellor, has dropped the clearest hint yet that the “triple lock” on pensions is for the chop. Speaking in the House of Commons, he confirmed that the lock would remain in place for the rest of the parliament – but said it would then be reviewed, and accused Labour of wanting to spray around money by committing to keep it.
Since 2010, the triple lock – introduced by George Osborne – has ensured that the state pension increases by the highest of average earnings, inflation or 2.5 per cent.
There is, of course, a very strong case for shoring up OAPs’ purchasing power by linking their pensions to inflation, or even for linking the state pension to earnings in order to keep it in line with relative living standards.
Yet at a time of public spending restraint the triple lock appears pretty indefensible, considering the enormous burden it places on the public finances.
The Treasury claims that every eligible pensioner will receive an extra £570 in 2016-17 due to the state pension increasing under the triple lock rather than by average earnings.
According to the Department for Work and Pensions, there are around 12.96 million state pension claimants – meaning that the policy has cost an extra £7.4 billion for the year 2016-17 alone. That’s equivalent to 13 large state of the art hospitals.
If the triple lock continues, the burden on the public finances will only increase. The extra cost, compared with uprating pensions in line with earnings, will be 7 per cent by 2040 and 14 per cent by 2065, according to the Pensions Policy Institute. These figures are roughly in line with analysis by the Government Actuary’s Department, which projects costs to be 9 per cent higher by 2040 and 23 per cent higher by 2070.
Even though the fiscal burden of the triple lock is clear, some argue that it is justified because pensioners’ living standards need to catch up with the rest of the population.
But this claim doesn’t stand up to scrutiny. Analysis by the Institute for Fiscal Studies shows that pensioners now have higher incomes on average than the rest of the population, once housing costs and family composition are taken into account.
The triple lock is economically unsustainable and difficult to justify going forward. Yet while the policy needs to be revised, doing so will be fraught with political difficulties. Pensioners vote in disproportionate numbers – and politicians still remember the outrage when the state pension was only increased by 75p in the year 2000.
Back in August, Baroness Altmann, the former pensions minister, made a very welcome intervention, calling for an end to the triple lock by 2020. It is encouraging to see that senior Conservative figures appear to be coming to the same conclusion, namely that the triple lock is fiscally unsustainable.
After 2020, the state pension will need to be linked to either earnings or inflation. A watered-down approach may be to reduce the minimum increase underpinning the triple lock from 2.5 per cent to 1.5 per cent – which may go some way to reducing the burden on the public finances.
What’s clear is that this issue will need to be tackled over the next few years – and certainly before 2020.
This is an updated version of a piece for the Centre for Policy Studies. Read the original here.