Why the state pension triple lock should be axed

Editor’s Comment: the country has taken a huge economic hit likely to rumble on for years, and it’s the working generations, and particularly the young, who will carry the bulk of this burden, argues Faith Glasgow.

How are we going to pay for the economic damage done by the coronavirus crisis? It’s a question that’s receiving increasing airtime, and justifiably: as was reported in mid May, an internal Treasury document has found that the pandemic’s impact will cost the government almost £300 billion in 2020 alone.

Some commentators say that in these days of ultra-low interest rates, the minimal cost of servicing this debt in GDP terms means we don’t need to worry too much about paying it off at all. But many others – the Treasury included – are casting about for the most effective cuts in public spending to whittle it down.

The Treasury report highlighted income tax increases and a public sector pay freeze. It also picked out for special mention the state pension ‘triple lock’ introduced in 2011/12. This ensures that pensions rise each year by the greatest of average earnings growth, consumer prices index inflation or 2.5%. Replacing the triple lock with a ‘double lock’ comprising the higher of inflation or earnings growth could save around £4 billion a year – a drop in the ocean when you’re suffering a £300 billion hangover, but a start all the same.

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Unsustainably expensive

Indeed, although both Conservative and Labour committed to retaining it in the last election, the system has long been criticised as being unsustainably expensive in the long term, especially as the population ages: the Office for National Statistics calculates that by 2050, a quarter of the UK population will be aged 65 plus, up from one in five in 2018.

But the triple lock also means that in periods when growth is stagnant and inflation low, pensioners are seeing a greater uplift to their income than workers are getting, as the 2.5% factor kicks in. That happened three times during the austerity-driven decade after the financial crisis – in 2013, 2015 and 2017.

So should the triple lock be ditched? In its favour, the present system has ensured that many hard-up pensioners have received above-inflation increases in their annual income over the past decade, which has left them a little better off than they would otherwise have been under the UK’s less-than-generous state pension system. The triple lock has also been some compensation for the rock-bottom interest rates of austerity decimating their savings.

However, there are arguments against it now, in terms of both fairness and financial necessity. According to a report by the Social Market Foundation in April, the well-being of the elderly, as the most vulnerable to coronavirus, has been rightly prioritised by society as a whole in the past months of lockdown and economic shutdown, so the removal of the triple lock “would demonstrate reciprocity”.

Those who had family members in care homes and have lost them to the virus might have a different perspective on the well-being of their loved ones. But the fact remains that the whole country has taken a huge economic hit likely to rumble on for years. There’s no leeway for preferential treatment.

It’s the working generations, and particularly the young, who will undoubtedly carry the bulk of this burden. Many have lost their jobs and will emerge into a world of low growth, reduced demand for many services, and higher taxes. In many cases they’ll have to reinvent themselves and create a new life. My stepson, aged 25, is a case in point. He’s a qualified airline pilot who until he was furloughed was training new pilots. With British Airways laying off a quarter of its pilots and other airlines such as Flybe collapsing altogether, it’s hard to imagine much of a future in the air for him.

Of course, pensioners have contributed to their state pensions throughout their working lives and need a guarantee that they will not now become poorer than the rest of society in relative terms. A double lock based on the higher of inflation or average earnings is the obvious alternative, as it would mean their income kept pace both with that of working people and with price increases. But the triple lock should go, in the interests of the economy and of fairness.

moneyobserver.ed@moneyobserver.com

Faith Glasgow is the editor of Money Observer.