When you do the maths, you see that the state pension is neither too generous nor financially unaffordable, writes JAN SHORTT
WHO WOULD have thought that just a few weeks ago the future value of the state pension would become a major election issue? But hardly a day goes by without someone suggesting the triple lock is too generous and should be scrapped.
This comes as no surprise given that over the last few years various right-wing think tanks, media commentators and government ministers have all been lining up to say that the system that gave pensioners a £3 a week rise this year was effectively both unaffordable and unfair to younger generations.
The decision by Labour to keep the triple lock if it wins the election, while the Tories have yet to explain what they intend to do, now means that this could be a significant vote winner. But part of making this a successful argument rests on understanding how we got here and why the triple lock is important for both today’s and tomorrow’s pensioners.
When the Labour government decided to raise the basic state pension in line with inflation in April 2000, it faced a huge backlash. A 1.1 per cent increase based on the Retail Price Index (RPI) produced a 75p a week rise, which was widely seen as both insulting and totally inadequate.
In 2001, as a result of pressure from organisations like the National Pensioners Convention (NPC), chancellor Gordon Brown made a commitment that in future the basic state pension would rise by a minimum of 2.5 per cent or inflation, whichever was higher.
When the coalition government came to power in 2010, it kept the 2.5 per cent guarantee, but replaced the RPI that Brown had used with the lower Consumer Price Index (CPI) and added average earnings. These three elements of indexation became known as the “triple lock.”
However, it is the 2.5 per cent guaranteed minimum increase introduced in 2001, rather than the other two elements (CPI and earnings), that is really now under attack.
Much of the current argument surrounding the triple lock is based on the claim that it is too generous and financially unaffordable. Yet the figures don’t support that view. In the six-year lifespan of the triple lock, it has given a higher award than pensioners would have received anyway under the system that had been in place since 2001 on just one occasion.
The claim that the triple lock is too generous also ignores the very real reduction in value that the state pension suffered when the link with earnings was broken by the Conservative government in 1980. In 2010, when the triple lock was introduced, the pension would have stood at £161.30 a week had the earnings link still been in place, compared to the actual figure of £97.65.
This loss, including when the triple lock was in place, has never been recouped. The critics therefore have to argue that pensioners have done better out of the triple lock than younger people at work because the state pension has risen faster than average earnings.
However, the actual growth that has taken place in the pension and average earnings over the last 15 years reveals that the gap between the two has widened. As a result, average wages now stand at £26,260 compared with a basic state pension of just £6,359.60 a year.
Using percentage increases often paints an inaccurate picture of how much money people actually receive. For example, a 10 per cent increase on £6,000 is less than a 5 per cent increase on £20,000, and yet this is being used as an argument to say the triple lock has been too generous.
Any suggestion that state pensions have therefore risen by more than average earnings in real terms is simply incorrect. If anything, the state pension is falling behind.
Those against the triple lock also argue that it is unfair on younger workers who are seeing state pensions rise faster than their own wages. However, the pay-as-you-go National Insurance system that funds the state pension is based on today’s workers paying for today’s pensions, just as today’s pensioners did when they were at work. This is a principle of generational solidarity rather than unfairness.
Critics of the triple lock such as Baroness Ros Altmann and former work and pensions secretary Iain Duncan Smith have started to argue that it should be replaced with a system whereby the state pension would be linked to earnings, but would have a temporary link to inflation if it exceeded wage growth.
In effect it would introduce a rather complicated double lock that would do little to help the 1.8 million existing pensioners who still live below the offical poverty line, or the 6.5 million who have an income of less than £11,500 a year. It is also unlikely that it will help future generations of pensioners.
A recent National Audit Office report found that 76 per cent of people reaching retirement in 2060 will be worse off under the new state pension than if they had been on the old system.
Millions of future pensioners are also likely to have less generously defined contribution occupational pensions and a rising state pension age of 67 and beyond. The need for a decent living state pension will therefore be even more important for this generation than for their parents and grandparents, but reducing it by removing the triple lock will make this almost impossible to achieve.
Future governments will also need to consider whether or not they are prepared to support a system that might produce a repeat of the 75p incident that forced a change to indexation back in 2001. A return to a style of indexation that does not offer a meaningful, minimum guarantee will inevitably see a decline over time in the value of the state pension, just as was the case after 1980 when the link with earnings was broken.
That’s why all generations need a universal state pension set at 70 per cent of the living wage (around £200 a week) which rises every year in line with the higher of wages, inflation (RPI and CPI) or 2.5 per cent.
This is the NPC’s campaign and one which we will be pressing all the political parties to adopt as part of our Pensioners’ Manifesto for the election.
Jan Shortt is general secretary of the National Pensioners Convention.