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Had Prospect invited me ten years ago to write about the state pension, the question in play would have been, “what can Britain do to reduce pensioner poverty?”
The triple lock—by which the state pension is increased by whichever is highest out of inflation, earnings, or 2.5 per cent—has provided a lock, stock, and barrel answer to that question.
Once housing costs are factored in, pensioners are now the least likely section of the population to be poor. The rate of poverty among pensioners has fallen by 6.2 percentage points over the past decade; three times the size of the fall among children. Poverty among childless adults below pensionable age actually increased 1.1 percentage point over the same period.
The Commons Work and Pensions Committee, which I chair, has therefore concluded that the triple lock has done its job in advancing pensioners’ living standards. The Committee has also recommended that it should cease to operate after the next general election.
The Committee’s aim here is not to destroy the real gains that have been made for pensioners’ living standards, but to entrench them in a more sustainable way. The combined effect of affording generous protection to the whole pensioner population for the whole of the current decade will be to increase the amount of welfare spending on pensioners from £105.9bn in 2010 to £117.2bn in 2020; a real terms increase of £11.3bn (11 per cent).
Looking only at the triple lock, the Office for Budget Responsibility last year put its cost at £2.9bn in 2014-15; £2.4bn higher than forecast in June 2010.
Against this increase, welfare spending on families below retirement age—many of whom are in work and have children, or have disabilities—will have fallen from £98.3bn to £84.9bn; a real terms reduction of £13.4bn (14 per cent) over a decade. A large proportion of these cuts will have come from reducing the scope and generosity of benefits available to low-paid workers.
This same group of people have had many of the certainties which those in my generation could expect from life—homeownership and company pensions, for example—snatched away from them. People who were born between 1981 and 2000 face being the first in modern times to be financially worse off than their predecessors. They will naturally resist any further cuts to their income that might be proposed as part of the government’s deficit reduction programme, particularly if the triple lock remains in place.
Another important aspect of this debate can be traced back to a decision taken by the Attlee Government after the Second World War. It was decided that state pensions would be run on a pay-as-you-go basis, i.e. that the workforce of the day would meet the costs of paying that same day’s pensioners their state pension.
The government decided against Beveridge’s proposal for building up a fully funded scheme in which each generation would pay for its own state pension. The pay-as-you-go system was chosen, understandably, to allow pensioners in the immediate post-war period to benefit from the new system.
But that system is now generating a large and growing bill which each successive generation of workers is being asked to foot. The post-war baby boomer cohort now entering retirement is particularly large and people within it will tend to enjoy longer retirements than could have been anticipated in years past.
Even with the increases in the state pension age, if the triple lock remains in place it will combine with these demographic trends to exert considerable upward pressure on pension expenditure. Again it is worth mentioning that this expenditure must be paid for by the contributions made by today’s working population whose earnings have recovered only very slowly from the financial crisis of 2008.
A bust-up between those below and above pensionable age needs to be avoided, though. Hence the Committee’s recommendation for a smooth and orderly transition between the triple lock we have at present, and a double lock we wish to see coming into operation in the next parliament.
This proposal would maintain pensioners’ living standards relative to the rest of the population, but cease to discriminate against those below pensionable age.
It was once thought that, if a group of politicians were to propose a replacement for the triple lock, the sky would fall in. That we are all still here suggests the government should now take a serious look at the Committee’s recommendations, with a view to answering the question, “How can Britain build on its recent success in reducing pensioner poverty?”
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