The coalition government policy that led to state pensions rising quicker than wages should be scrapped as part of an “intergenerational reciprocation” for the costs of battling Covid-19, a think-tank has said.
The Social Market Foundation (SMF) proposes that the massive economic cost of the emergency measures deployed to manage the pandemic must be shared fairly between the old and young, and that some of the huge anticipated government deficit could be funded by abandoning the so-called ‘triple lock’ guarantee on state pension rises.
Scott Corfe, the SMF’s research director said: “Quite rightly, society is making sacrifices to protect its elderly right now. There is a clear case for intergenerational reciprocation when it comes to meeting the fiscal costs of the crisis in the years ahead.
“The crisis has emphasised our obligations to other generations, even in the face of personal sacrifice. This spirit must be maintained when the dust settles – with the economic costs of responding to the crisis shared fairly across the generations.”
The triple lock, which was introduced in 2011 by the coalition government, guarantees the Basic State Pension will rise by a minimum of 2.5%, and the highest of the rate of inflation or average earnings growth.
Before 2011, the state pension rose in line with the retail prices index measure of inflation, which was typically always lower than annual rises in earnings.
However, it can be argued that the introduction of the triple lock has been successful in that it reversed the gradual decline of state pension and has made up a lot of the ground it had lost in the 80’s and 90’s.
Analysis conducted in 2017 by the Institute of Fiscal Studies showed that between April 2010 and April 2016 the value of the state pension had been increased by 22.2%, compared with growth in earnings of 7.6% and growth in prices of 12.3% over the same period.
The economic ‘think-tank’ said the policy had pushed the value of the basic state pension up to its highest share of average earnings since April 1988, while the government actuary’s department calculated that the increased benefit to pensioners cost roughly £6bn during 2015–16, when compared with rises that would have occurred via earnings indexation.
In its briefing paper published on Tuesday, the SMF said any future austerity programme must not favour pension spending over working-age welfare, as happened after the financial crisis.
In its paper, the ‘think-tank’ argues that the economic impact of lockdown policies, which it says, “have rightly been deployed to protect the lives and wellbeing of those most vulnerable to the virus”, is falling most heavily on working-age Britons, “many of whom face redundancy followed by years of higher taxes, reduced services, and slow economic growth”.
The paper proposes replacing the triple lock with a “double lock” that removes the 2.5% promise and would save an estimated £20bn over five years.
“In the context of an annual deficit that could reach £200bn as we emerge from the crisis, shaving £4bn a year from the growth of the £100bn pension bill is not too much to ask. It would also demonstrate reciprocity from a group whose wellbeing was, rightly, prioritised during the lockdown phase of the crisis,” the SMF said.
However, it is worth remembering the wide variation in income that some retired people receive. For instance, in addition to the state pension, some people may also be in receipt of one or two Company pension schemes, which may be final salary based and the combination of all these could make them close to, or already 40% tax payers. At the other end of the scale, you may find that other people purely rely on the basic state pension of £9,110 p.a. as their only income. But there are also many pensioners who do not even receive a full state pension, as they may not have the correct level of National Insurance contributions, these people are very often women. Any reduction to the increases in pension will have a bigger impact on this group of pensioners compared to those people at the other end of the scale on much higher income.
The government are in a dilemma, given their election manifesto promising to keep the triple lock in place. With an increase in spending already on the agenda before Covid-19 hit, the government are in a real quandary as they wrestle with the economy through this stagnating period. However, the dilemma is that if there is no change to the triple lock, the government will face increasing pressure to consider increasing state pension age as a way of reducing the bill of retirement benefits in the future, even though this could hurt future generations.