The “triple lock” is the most high-profile and contested area of pensions policy. It is also the most misunderstood. The lock, which ensures state pensions rise annually by the highest of average earnings growth, inflation or 2.5%, is almost always discussed in terms of the trade-off between pensioner benefits and working-age benefits. But to frame it simply like this is an error.
Thérèse Coffey has today announced the suspension of the triple lock. It will be welcomed by those who believe we need to rebalance public spending from the old to the young. However, despite many arguments to the contrary, young people are in fact among the main beneficiaries of the triple lock. They would actually suffer from its removal.
The idea that scrapping the triple lock would be in the interests of intergenerational fairness rests on a false presumption that if we spend more money on one group of people, we must spend less on another. Yet we can and should spend more on social security for young and old people alike. More important, because the triple lock will have been in operation for decades by the time younger people reach retirement, they will benefit from pensions that are far greater than those of today’s retirees – such is the power of compound growth over time.
To believe that a Conservative government would invest what it saves by removing the triple lock on today’s young people requires some magical thinking. In practice, by reducing the state pension accrual rate (the entitlements we build up in return for paying national insurance), scrapping the triple lock would effectively amount to a significant tax hike on young people. That’s because the tax they pay now would entitle them to a lower income in retirement than previously anticipated.
George Osborne introduced the triple lock in 2010 in order to reward the Conservatives’ ageing support base. But the right policy introduced for the wrong reasons is still the right policy. The value of the UK state pension is already one of the lowest in the Organisation for Economic Co-operation and Development (worth less than in any EU country). This was exacerbated by the then coalition government’s abolition of the state second pension (creating a single state pension benefit) which, of course, harms today’s young people the most, because they will spend most or all of their working life entitled to only the new state pension, rather than the more generous previous system.
Some argue that the UK system is fairly unique because it spends more on subsidising private pensions through pensions tax relief (which costs about £20bn a year). But tax relief does not work as a saving incentive, and its benefits are concentrated on the wealthiest savers. There remains no credible case against the state simply investing these billions in its own state pension system, given its unrivalled capacity to manage very long-term financial risks arising from economic downturns and demographic change.
It is clear that today’s young people – saddled with student debt and facing astronomical housing costs – are unlikely to accumulate wealth at the same rate as the baby boomers. Yet this does not mean that the rather meagre state pension should not continue to increase. If the government really wants to alleviate intergenerational inequality then it should tax some of the wealth that older generations have accumulated. It is worth remembering that the recently and soon-to-be retired have already seen large cuts to their lifetime state pension income due to increases in state pension age – which impact most unjustly upon poorer groups with lower life expectancy.
The bleak prospects facing many young people are all the more reason to boost the value of the state pension, so they can look forward to higher financial security in retirement. Doing it gradually (in other words, using the triple lock or something similar) is the best way of ensuring the benefits of increasing the state pension accrue mainly to the young.
This doesn’t mean there can be a cast-iron guarantee that the triple lock will remain in place in perpetuity. But the case for increasing the value of the state pension, whether by maintaining the triple lock or another similar measure, is overwhelming. The best way of directing state pension expenditure towards younger generations would, of course, be a steep, one-off increase in its value as these people approach retirement. But increasing the state pension gradually is much more likely to be feasible, politically, than the prospect of a more radical increase at some undefined future point. This is precisely because of the way the triple lock benefits today’s retirees a bit, while it will stealthily benefit tomorrow’s retirees a lot.
The more we raise the state pension now, the harder it will be to cut it back in future. And even if it were the case that the triple lock is intergenerationally unfair now, it would be a small price to pay if steadily increasing the state pension eventually reduces younger cohorts’ reliance on private options as the old world of occupational pensions crumbles.
It is worth noting, finally, that the present debate around state pension indexation is not really focused on the triple lock at all. The third “lock” in the current policy is the 2.5% bit, but the state pension had been due to rise sharply by 8% due to the second lock, that is, earnings growth – as a result of the peculiar way in which the Covid-19 pandemic has affected the UK labour market. Some see this as policy failure; I see it as a silver lining. It was the Thatcher government that removed the state pension “earning link” in 1980, leading to an avalanche of pensioner poverty, and its restoration rightly became an article of faith on the left. If we cannot support all benefits rising in line with living standards, without exception, then we cannot make the case for any benefits doing so.