Whoever coined the term “triple lock” to apply to the UK state pension deserves a gong for services to political discourse. Those two small words must count as a spectacular success. They inspire confidence, positively exude reassurance, and speak of a cast-iron government guarantee right up there with “national savings”, gilt-edged stocks and the rest.
It now appears that those words, and more to the point the guarantee they represent, are going to be ditched. Asked time and again since announcing the election, Theresa May has refused to stand by the “triple lock”. She refused one more time at the last Prime Minister’s Questions of this Parliament. The conclusion must be that the pledge will not appear in the Conservative election manifesto, and the guarantee will be dropped.
In other words, those currently receiving, or about to receive, the state pension, will have no assurance that its value will be maintained. The “triple lock” – which promises an annual rise in the state pension by whichever is highest, the inflation rate, the increase in average earnings or 2.5 per cent – will be no more.
Now it could be argued that its survival until today is more surprising than its likely demise. It is seven years since the “triple lock” pledge was given by the Coalition – a government, by the way, that deserves to be judged far more kindly than it is today – and it is only now, in the extraordinary circumstances of a snap election hitched to the Brexit negotiations, that it appears to be on the way out. But it should not be allowed to pass into history without the case being made in its defence.
The UK state pension even now compares very poorly with those in most European countries. The annual increase under the “triple lock” did something to narrow the gap between pensioners and the rest of the population, but only something.
The idea that it allows recipients to live the life of Riley, as many seem to believe, is born of confusion between a very visible minority who seem to swan from cruise to cruise, and the majority, especially women, for whom the state pension (or less) is their only income. This first group includes members of a fortunate generation who enjoyed generous final-salary pensions of the sort that, as of now, are the almost exclusive preserve of the public sector. The state pension will become more necessary, not less.
After drawing disproportionate attention to the wealthiest pensioners, critics of the “triple lock” then train their lens on the supposedly vast cost. Less than 3 per cent of not very much – as it has worked out – is still not very much. Plus, a proportion of the cost will have come back to the Exchequer in the form of tax paid by those whose retirement income is above the tax threshold. Pensioners pay income tax, too.
There is also the none-too-small matter of social solidarity. The state pension is almost the only payment from the state now that bears any relation to contributions. In fact, it should not really be classed as a benefit; those receiving the state pension have paid for it. More costly to the public finances is pension credit, paid to those whose retirement income falls below a statutory level. If only those who have not contributed or have not made full contributions qualify for a state pension, how soon before those who do pay revolt, and the pension becomes just another benefit to be paid out of general taxation?
This is what would happen if, as the OECD has just proposed, the better-off 5 or 10 per cent were excluded from the state pension. It recommends that the money saved could be used to improve payments to the poorest. But that is to reject the social solidarity arguments and ignore how much money from precisely this group of pensioners returns in tax. It may be that, with the new opt-out pension arrangements, the state pension will be phased out down the line, but that is a long way away.
Is there any halfway house short of the “triple lock” that might offer similar reassurance? Forecasting is dangerous; but if I were choosing one of the three guarantees to be kept, it would be the link to inflation. With the post-referendum devaluation of the pound now making itself felt in the shops, and the difficulties high inflation poses to those on fixed incomes, this is the “lock” I would keep.
That said, the abandonment of the “triple lock”, if it happens, will be as much about politics as economics. It will signal that the Prime Minister and her advisers have been swayed by some of the most vocal – and questionable – special pleading of recent years: on the part of the so-called millennials (and their parents). Perhaps the most eye-catching argument here is the one from the Resolution Foundation think tank, according to which the typical pensioner household is now £20 a week better off than the typical working-age household, so the “triple lock” has done its job.
The argument is flawed, though this has not stopped it being parroted again and again. The figures are skewed by the great wealth of a comparatively few pensioners, and the inclusion of pensioner households where one half of a couple may still be working. Even then, the comparison is valid only with one huge qualification, which is rarely mentioned except in the small print. This is that the calculation relates to “disposable” income and, crucially, excludes housing costs – as though pensioners do not have other major outgoings, including health costs, and did not also struggle in their time with housing, because of mortgage rates many times higher than today.
Politically, it would seem that Theresa May’s brand of Conservatives see a risk in being regarded as a party that “panders to pensioners” and want to broaden their generational appeal. They may also believe that, if the state pension remains index-linked, the removal of the “triple lock” will not actually matter.
Dropping the guarantee, of course, will send an equal and opposite message to pensioners. While the “triple lock” did not add enormously to the pensions bill, once tax paid is considered, its symbolic value, as reassurance, was huge. Will its loss sway the older vote? Probably not – and that is the relatively safe gamble Theresa May has apparently made: just another cheap shot in the hope of short-term electoral gain.