6th November 2016
An influential committee of MPs has called for the end of the triple lock on the state pension citing unfairness to younger generations.
The Work and Pensions committee report says the state pension triple-lock will worsen an economy already heavily “skewed” towards baby boomers and against millennials, and it should be scrapped. It says that all parties must seek political consensus on a new earnings link for the state pension before the next general election.
The triple lock sees the pension upgraded annually by earnings, inflation or 2.5% whichever is the greater. The continuation of the system was confirmed by Theresa May until the next election, which it was questioned after the referendum to leave the United Kingdom.
The Work and Pensions Committee says retaining the triple-lock would lead to state pension expenditure accounting for an ever greater share of national income which is unfair and unsustainable, and more so in times of fragile public finances and economic uncertainty.
Accelerated increases in the state pension age or an alternative means of making the state pension more fiscally sustainable, would disproportionately affect the young and those socio-economic groups – already worse off – with lower life expectancies in retirement.
The millennial generation, born between 1981 and 2000, faces being the first in modern times to be financially worse off than its predecessors.
As the taxes of working people support record numbers of the retired, the ageing population places strain on those in work.
After housing costs average pensioner household incomes now exceed those of working-age
Improvements in retirement incomes have not been matched elsewhere: children are now twice as likely as pensioners to be living in poverty
Many young people are priced out of homeownership – and do not have access to generous occupational pensions – and are therefore locked out of building wealth
The Committee says pensioners have been protected from the public spending cuts that have largely been felt by younger groups, and that universal benefits like the Winter Fuel Payment should “not be off limits” when Governments seek savings.
Universal pensioner benefits have been deployed by successive governments for reasons of short term expediency. Such measures, which are not usually indexed, lead to ill-targeted support, further complicate the benefits system and are politically and administratively far harder to put right than to introduce in the first place.
Triple lock replacement proposal
The Committee proposes a smoothed earnings link for the state pension. The new state pension would have a benchmark proportion of average earnings below which it could not fall. By 2020, the level of the NSP will be close to historic highs for the headline rate and above the means-tested minimum. It is a solid foundation for personal saving.
If inflation exceeded earnings growth, the purchasing power of the state pension would be protected by price indexation. This price indexation would continue once earnings growth again exceeds inflation until the state pension is again at the benchmark level.
The committee says this is fiscally sustainable (unlike a simple double lock, which would mean the value of the state pension continuing to grow relative to the rewards of work, especially during times of economic difficulty) but fulfils the objectives of supporting pensioners who would share in the proceeds of growth and get protection against high inflation.
Frank Field MP, Chair of the Committee said: “The welfare state is underpinned by an implicit intergenerational contract. Each generation is supported in retirement by their in-work successors. This is supported by all age groups, but a combination of factors has sent the balance out of kilter. It is now the working young and their children who face the daunting challenge of getting on in an economy skewed against them.
“Homeownership, taken as a given by many in my generation, is out of reach for too many aspiring young people today. At the same time as tightening their belts, they are being asked to support a group that has fared relatively well in recent years. Millennials face being the first generation to be poorer than their forebears. No party has been immune from chasing the pensioner vote –but at what cost to future generations? Politicians of all stripes must accept some responsibility for these trends, and we must act together now to address them.
“Great strides have been made against the scourge of pensioner poverty and the new state pension is at a level to provide an effective minimum income and encourage personal saving. It is time for the triple lock to be shelved. The system we propose protects pensioners and allows them to share the proceeds of future good times, but at the same time is inter-generationally fair. We call on all parties to get behind it.”
Tom McPhail, Head of retirement policy, at Hargreaves Lansdown: “Politicians are chronically compromised when making any policy decisions which might be detrimental to older citizens. You only have to look at the turnout in general elections to understand why: 78% of the over 65s voted, compared to just 43% of the eligible under 25s. The Triple Lock has served an important function in bringing pensioner incomes back into line with the rest of the population. It is also important to recognise that pensioner incomes will change again in the future, we are about to hit ‘peak DB’ after which successive pensioners will be increasingly reliant on the state pension and on defined contribution arrangements. Any measure to curb either of these in the next few years could rapidly push more pensioners back into poverty.”
Tom Selby, senior analyst at AJ Bell, says: “Margaret Thatcher’s decision to scrap the earnings link for the state pension in 1980 was seen by many as an attack on pensioners. The triple-lock has at least partly restored some of the value that was lost during that 30 year period. However, it was never meant to be a permanent measure and costs the Exchequer billions. The Government will be wary about hitting pensioners ahead of the 2020 election – and breaking its manifesto promise in the process – but beyond that the triple-lock’s future looks bleak.”