Replacing the triple lock

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Prior to Thatcher’s 1980 Social Security Act, the state pension in the UK was clearly and automatically linked to average pay levels. In practice, that meant that pensions generally maintained their value in relation to the pay of those in work. The link was broken with one, and only one, aim in mind – cutting the cost of state pensions to the Exchequer. From that point on, until 2001 when Gordon Brown promised to increase pensions by the rate of price inflation or 2.5% per annum, whichever was the highest, the basic state pension, as a proportion of average wages, fell. It was the Cameron government which amended the double lock to a triple lock by including a link to earnings in 2010, finally undoing the damage to pensioners’ income done by Thatcher 30 years earlier – but at a much lower starting point. In theory, the minimum 2.5% element of the triple lock should allow pensions to catch up – eventually – with the relative level at which they stood in 1980, but that depends entirely on the number of years during which 2.5% is the highest of the three elements. The other two only allow maintenance of the current position at any time, a situation with which both government and opposition seem entirely content. Both parties have attempted to mitigate the effects of their policies of deliberately holding pensions at a lower level than in 1980 by introducing things such as pensions credit. But these were, and are, little more than sticking plasters to avoid facing up to the big question. And, due to the miracle of compounding, the real beneficiaries of the triple lock (assuming its continued existence into the long term) are the pensioners of the future, not those of today. People refer to intergenerational unfairness, but the ones being treated unfairly are today’s pensioners, not tomorrow’s.

The big question referred to above is, of course, ‘what is the right ratio of basic state pension to average earnings?’. Only when that question is answered is it really possible to discuss for how long the triple lock and the associated sticking plasters should be left in place, and over what timescale (at the cost of leaving many pensioners in relative poverty in the meantime) should that level be reached. It’s a question which all the talk of the ‘unaffordability’ of the triple lock, and the various suggestions about abandoning it, stubbornly refuses to address. But a single and direct ratchet mechanism which links basic state pension only to average earnings would be entirely adequate if that ratio was initially set at the right level, and would also ensure equity between pensioners and others during inflationary periods. The reason that they avoid the question is the obvious one – any rational discussion would set the basic state pension at a significantly higher proportion of wages than it is today. The UK has one of the lowest levels of pension in the developed world, with the basic state pension representing less than one-third of the average wage. Bridging that gap would be expensive, yet other countries – apparently poorer, measured by GDP – manage it.

Comparisons aren’t straightforward, of course – not least because the UK has a well-developed system of occupational and private pensions which many receive in addition to the state pension. Those don’t apply to everyone – although the people doing the discussing and making the decisions are invariably actual or future beneficiaries of those additional sources of income, and it is all too easy for them to lose sight of the fact that the poorest pensioners are entirely dependent on the state pension as their only source of income. That often leads to suggestions of top-up benefits for which people can apply or else some system of means-testing; but those are over-complex ways of addressing a situation which can quite easily be addressed by a properly progressive system of taxation – to say nothing of closing those loopholes which enable the very wealthiest amongst us (including the wealthiest pensioners) to take some of their income as capital gains at a lower rate of taxation.

So, what is the ‘right’ level? Half? Two-thirds? Three quarters? It’s certainly not ‘less than one-third’ if we want our pensioners to enjoy something approximating to the standard of living that they enjoyed when they were working (and is that really the unrealistic aspiration as which so many seem to see it?). Seeing pensions only as a ‘cost’ rather than a question of providing that standard of living is avoiding a proper debate. Yet it’s where both the government and the opposition are currently sitting.