The state pension triple lock should be abolished because in increases intergenerational unfairness and threatens the social contract of the welfare state, a report from a committee of MPs proposes.
A report from the Work and Pensions Committee says the intergenerational contract that underpins the welfare state has been put under strain by the generosity of the provision of benefits and public services to the current pensioner population funded by the taxes of the current working-age population.
The report comes as former pension minister Baroness Altmann has cited Government Actuary’s Department figures – no longer freely available – that show maintaining the 2.5 per cent annual increase could double the cost of the state pension by 2070 in deflationary conditions.
The triple lock, which was introduced in 2012, annually uprates the state pension by whichever of price inflation, average earnings growth or 2.5 per cent is highest.
The committee proposes a smoothed earnings link for the state pension, that combines prices and earnings, rather than a simple double lock, that would mean the value of the state pension continuing to grow relative to the rewards of work.
But Barnett Waddingham senior consultant Malcolm McLean has hit out at the proposal, saying the new state pension is not generous, being only 5p higher than the amount payable under Pension Credit.
Frank Field MP, chair of the committee says: “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.”
Baroness Altmann says: “Keeping the 2.5 per cent in long-term forecasts could double expected state pension costs: A Report produced by the Government Actuary’s Department (GAD) last year – published but then hastily withdrawn one day later – suggested that the cost of the triple lock has been about £6bn a year. The GAD Report also said the cost of the triple lock could well be ‘materially higher’ in future, especially if earnings and price inflation stay low for a longer time. On its most likely scenarios, keeping the triple lock could add around 10 per cent to spending on state pensions by 2040, but in a deflationary scenario the triple lock could more than double the cost of just linking to earnings by 2070.”
Aegon pensions director Steven Cameron says: “The Government must not set long term pension policy on the basis of those currently in retirement as those retiring in future are much less likely to match the incomes of current pensioners. The state pension remains the bedrock of many people’s income in retirement and pensioners must be given some stability over its future level. We believe any government should commit to state pension increases for its 5 year period in power with intentions set out in pre-election manifestos.”
Barnett Waddingham senior consultant Malcolm McLean says: “The case for and against a continuation of the triple lock continues to divide opinion, both inside and outside of government.
“Scrapping it is one of those “courageous” decisions that politicians may be extremely reluctant to make, for fear of losing the pensioner vote, but yet are aware of the cost for the economy of maintaining such an open ended commitment for an indefinite period of time. An early political consensus is certainly desirable but is far from certain that it can be achieved.
“I am personally not convinced that this is solely an intergenerational issue about millennials versus baby boomers, as implied by the Committee. There is no certainty that getting rid of the triple lock would put extra cash directly in the pockets of millennials, or indeed people of working age more widely. Also it is a fact that our state pension is not especially generous – even the shiny new state pension at £155.65 a week is only a mere 5p above the Government’s specified minimum income level of £155.60 a week as measured by the means-tested Pension Credit – and a failure to continue to provide adequate uplifts in its value runs the risk of putting more and more pensioners into poverty in the future.
“If it is decided that the triple lock has to go this may be the time to introduce a new dedicated pensioner index, one which concentrates on the cost of living increases that affect older people more significantly than others. These would probably relate to expenditure on food and heating costs with less emphasis on housing and travel.”