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14 September 2023

The triple lock is an economic absurdity

Ending an expensive and haphazard pension system would be an act of fiscal sanity.

By David Gauke

Just now, there is no such thing as good news for the government. When the latest wage data was published on Tuesday, showing that living standards are finally rising, the focus was immediately on next year’s increase in the state pension and the cost to the public finances. And rightly so. An 8.5 per cent increase (the rise in average earnings) will cost £2bn more than had been budgeted. In part, this is because of one-off, unconsolidated bonuses to public sector workers which have distorted the calculation.  

This has provoked a wider debate on how we calculate state pension increases. Since 2010, they have increased by the higher of earnings, inflation or 2.5 per cent – the “triple lock”. In good economic times, inflation might be around its 2 per cent target and earnings growth at (or a little higher than) 2.5 per cent. All very straightforward, pensions retain their relative value compared to earnings but the increases are broadly affordable.

The reality since 2008 is that we have been living in a period of greater volatility in earnings and inflation. To illustrate this, in the 13 years since the triple lock was introduced, inflation was the highest of the three measurements in six of the years, earnings the highest in four years (although for the fourth of those occasion, 2022, the triple lock was suspended because of the distortions to earnings growth created by the pandemic) and 2.5 per cent the highest in three years.

By jumping around from one measurement to another, the state pension has risen over time by much more than any of the individual component parts. An inflation-only approach would have seen the state pension rise in nominal terms by 42 per cent; earnings would have seen an increase of just 40 per cent; but the triple lock has seen it increase by 60 per cent.

There will be plenty of people (not all of whom receive the state pension) who will say that this is quite right, too. Our state pension is lower than in many other developed countries and all that has happened is that we have caught up some of the ground, a trend which should continue. 

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There are, however, problems with this argument. For a start, we cannot ignore the context of the public finances and the fact any government must prioritise. It is, admittedly, a little unfashionable to argue that hard choices had to be made after the 2008 financial crisis to put the public finances on a sustainable footing, but it is certainly the consensus opinion today (judging by the fiscal approaches taken by Jeremy Hunt and Rachel Reeves). Spending more on the state pension means taxing more or spending less elsewhere.

[See also: Labour still needs the unions]

The public finances are very hard pressed. Our debt interest bill is forecast to be the highest in the developed world, public services need more resources, defence spending is likely to rise rather than fall (as it has in recent decades) and an ageing population means we have to spend more on health and social care. At the same time, taxes are at a postwar high and government debt is at its highest level since the early 1960s. Protecting the state pension from inflationary spikes or falling behind average earnings is reasonable but prioritising a rapid increase in its value – at the expense of other priorities – is not.  

But if that is to be our choice, we should do that as an active decision not as the haphazard consequence of economic vagaries. As the Institute for Fiscal Studies (IFS) has pointed out, the triple lock is not only potentially expensive but also unpredictable both for policymakers and pension recipients. The IFS calculates that if we keep the triple lock in place until 2050, it might cost the exchequer an additional £45bn a year in current prices (the same as the Ministry of Defence’s entire budget). Or it might cost just £5bn. It all depends on the volatility of inflation and earnings.

No wonder the Work and Pensions Secretary, Mel Stride, has been prepared to admit that “in the very, very long term [the triple lock] is not sustainable”.  He is spot on, assuming that “the very, very long term” means approximately now. In recent days, both Rishi Sunak and Angela Rayner have equivocated on whether their parties will commit to the policy in their next general election manifestos.

But one can see why both main parties are hesitant. If one party were to announce that it is to be scrapped, the other would make it a centre piece of their campaign. Pensioners vote, after all. That is why William Hague has suggested that the two parties “help each other out” and find a way to drop the policy.

There is a more immediate challenge.  As mentioned above, Tuesday’s earnings figures mean that the state pension might be expected to increase by 8.5 per cent next April. Some of that £2bn cost – £600-700m – is because of the public sector bonus. Including this impact would embed a one-off effect in the state pension on a permanent basis. Ministers should use the underlying earnings figure of 7.8 per cent, stripping out the extraordinary effects of the public sector pay settlement.

There is not yet sufficient awareness of the fiscal hole that we are in. To get out of it, we will need policies on growth, tax and spending that will be unpopular with many. Scrapping the triple lock has to be one of them.

[See also: The Trussites are plotting their comeback]

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