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12 October 2020

Why wealthy pensioners could be among the biggest winners from the economic crisis

Rishi Sunak is threatening a new era of austerity but the state pension triple lock will protect even the richest. 

By Jonn Elledge

The Covid-19 pandemic has been good for Amazon CEO Jeff Bezos and Eric Yuan, CEO and founder of Zoom. It has been bad, economically speaking, for almost everyone else. Hospitality is in crisis, the arts are in freefall, and the government careers website seems to think the solution to soaring unemployment is for everyone to become a lighthouse keeper or a pro-wrestler or something similarly realistic. We’re in a mess. 

But there is another group, aside from the owners of home shopping sites or remote working technologies, who stand to benefit from the implosion of the world as we know it, and for a far more esoteric reason: pensioners. In 2010, the Cameron government introduced the “triple lock”, a guarantee that state pensions would rise each year to match whichever was greatest: wage growth, price increases or 2.5 per cent. The result is a sort of ratchet effect, in which the state pension (currently £134.25 a week) over time inevitably increases relative to wages. Since the former wasn’t very generous to start with, this is not necessarily a bad thing.

However: the way the triple lock is designed has introduced some quirks into the system. Imagine the UK economy enjoys a “V-shaped recovery”, in which the pandemic causes GDP to crash precipitously but it swiftly bounces back. (This seems a bit optimistic to me, but it’s what Bank of England chief economist Andy Haldane suggested was happening in July, and for sanity’s sake let’s assume he knows more about this than I do.)

[See also: Stephen Bush: How I learnt to relax, stop worrying and love the triple lock pension]

That could mean that average wages fall this year, but see an unusually large increase next. The average worker could be earning no more in 2021 than they were in 2019. But because the triple lock was designed to ensure that pensions rise in line with wages, but can never fall in line with them, pensions would get a boost, too.

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This, the Resolution Foundation has predicted, is exactly what’s going to happen. Last week the think tank projected that wage volatility means that pensions will increase by 7.6 per cent over the next two years, compared to an average wage increase of just 1.5 per cent. (Again, that feels optimistic to me; again, what do I know.) The result will be spending an even larger share of government money on pensions, at a time when millions of working-age adults are struggling and the Chancellor, Rishi Sunak, is contemplating reducing debt by cutting welfare benefits and public sector pay.

And the state pension, remember, is not means-tested. Some pensioners are living in poverty, and may be desperate for that increase. But vast numbers are not – they are, indeed, among the most financially stable and securely housed people ever to have lived. Once upon a time, around 40 per cent of pensioners lived in poverty, a far higher rate than any other age group. Today, however, the number is less than half of that – still too high, of course, but lower than the rate among children or working-age adults. Yet at a time when hundreds of thousands of people are losing their jobs and the welfare budget is under more pressure than ever, we are guaranteeing we will spend an ever larger share of public money on benefits for rich people who own large houses.

I don’t know what the solution is here: I’m reluctant to criticise means testing, on the basis that services targeted at the poor tend to end up as poor services (just look at the state of the welfare budget). But the status quo, in which an ever larger share of public funding goes towards people who don’t need it, and no politician has the nerve to touch it, feels unsustainable. 

The economy has crashed, hundreds of thousands of people in precarious housing and with minimal savings are losing their jobs, and are finding that the welfare system is entirely incapable of supporting them. Is a pensions policy that means that, as a side effect of this crisis, we have to funnel yet more money to rich old people who don’t need it necessarily a pensions policy that’s fit for the times?