Baroness Altmann, the former Pensions Minister, made a very welcome intervention yesterday, calling for an end to the so-called “triple-lock” on pensions by 2020. Since 2010, the triple-lock has ensured that the State pension increases by the highest of average earnings, inflation or 2.5%.
There is, of course, a very strong case for making a link to inflation to shore up pensioners’ purchasing power, or even linking the State pension to earnings to preserve relative living standards. However, at a time of public spending restraint the triple-lock policy appears pretty indefensible, considering the enormous burden on the public finances.
As can be shown in Figure 1, the UK Treasury claims that every eligible pensioner will receive an extra £570 in 2016-17 due to the state pension increasing by 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 costed an extra £7.4 billion for the year 2016-17. That’s equivalent to 13 large state of the art hospitals.
Figure 1: Benefit per pensioner of triple lock vs earnings linked state pension
Table 1: Cost to public purse of triple lock vs earnings linked state pension (2016-17)
Benefit per pensioner
Number of eligible pensioners
Source: HM Treasury and Department for Work and Pensions
If the triple-lock policy continues, the burden on the public finances will only increase. The extra cost of the triple-lock, compared with an earnings uprating, will be 7% higher by 2040 and 14% higher by 2065, according to the Pensions Policy Institute. These figures roughly align with analysis by the Government Actuary’s Department, which projects costs to be 9% higher by 2040 and 23% by 2070.
Even though the fiscal burden of the triple-lock is clear, some argue that pensioners’ living standards need to catch up with the rest of the population. This claim doesn’t stand up to scrutinty, however. 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 policy is economically unsustainable and it is difficult to justify going forward. The policy needs to be revised but 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. After 2020, the State pension will need to be linked to either earnings or inflation. A watered down version may come in the form of reducing the underpin in the triple lock from 2.5% to 1.5%, 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…