Alexander Bowen is a trainee economist based in Belgium, specialising in public policy assessment, and a policy fellow at a British think tank.
Firstly there’s a sort of underlying reality here – had the triple lock been strictly applied since 2010 (that is correcting for the switch from RPI to CPI and for Sunak’s post-Covid furlough correction) the state pension would’ve risen by 96 per cent. Had instead the state pension been locked to a double lock – that is growing annually at the highest of either CPI or earnings growth, with no 2.5 per cent minimum growth – it would still have risen by 89 per cent. What the triple lock was worth then is just that gap – an extra 7 per cent over the course of 15 years.
Now 7 per cent is hardly ‘nothing’ – it’s £9 a week per pensioner or £5bn this year – but compared to the discourse about it, it might as well be. Relative to the size of public expenditure (£1,370bn) that triple lock is minimal at 0.35 per cent , compared to the deficit too it’s just 3.6 per cent. It is, more or less, the cost of the BBC but I am yet to see anyone make the case that the BBC is bankrupting Britain. Never mind, that state expenditure on old-pensions fell as a share of GDP has fallen in this time too – from 4.9 per cent in 2010 to 4.7 per cent at the end of the decade.
Now is the policy ideal?
Absolutely not. Any automatic mechanism can never be ideal. The triple lock’s specific technical problem – that years of high inflation are, as anyone who’d taken even one introduction to macroeconomics course could tell you, usually followed by years of high earnings growth – is a genuine issue but inflation’s double-counting would be equally true for a double lock.
The actually’ novel’ 2.5 per cent element itself (introduced by Brown but that was functionally irrelevant when using pre the switch away from RPI whose arithmetic mean meant inflation was always high) has only actually been used 4 times – and in two of those years was practically irrelevant with only a 0.1pp and 0.3pp deviation from a double lock. The actual measured effect of the double counting issue isn’t frankly that large either – only about £3bn by 2035 which again is certainly something but it is only about comparable to 1pp on corporate tax. It is again quite simply, not the cause of the UK’s financial issues.
The phrase ‘look after the pennies, and the pounds will look after themselves’ is true enough, in the best of all possible worlds the triple lock would indeed be ditched for not being maximally rational. But if the government was committed to pursuing maximally rational policy it would hardly be close to the top of the list. The question is of discourse priority, and the mental headspace it occupies relative to its actual impact would be enough to house every Nick, 30 ans rent-free.
Even taking the question of the state pension more broadly, the discourse again does not match the reality.
The statistic that 27 per cent of pensioners are millionaires is brought up time and time again but it is, as is nearly every ‘stat’ in British politics essentially junk. To start with it measures living in a millionaire household – meaning that the actual wealth per person can be halved – secondly, it’s 22 per cent down from 27 per cent in 2020 (which is hardly surprising given wealth’s value is after all extremely volatile), and most importantly it’s just how lifecycles work.
45 per cent of all wealth in the UK is pension wealth, and unsurprisingly the people with the most pension wealth are pensioners and those just about to retire (36 per cent of those aged 55-65 living in a millionaire household). The purpose of a pension is to save previous work to live on in future – and ‘bizarrely’ people retiring have had more work years to save from. A pension exists then as future income – treating it the same as artworks or even a house misses the point, in the same way estimating the future earnings of a 25 year old graduate and calling that their ‘wealth’ would.
Usually then, junk statistic in hand, and typically in the name of fairness, the discourse evolves into means testing the state pension – taking it away from the 22 or 27 per cent of households that are ‘millionaires’ with promises of vast savings to the taxpayer. It would of course save money and I’m sure it would look fair enough on a distributional chart but it would be anything but just. It would amount to mistreating the people who are maximally prudent, those who under any scenario actually paid in enough to justify their payments out.
For me at least, and I thought it was true for others, one of the core tenets of conservatism is having a more comprehensive understanding of fairness than equal outcomes. What means testing the state pension would look like is, ceteris paribus, telling a household that was maximally responsible – saving large sums into their pension and planning for their future – that they ought instead to have been irresponsible. As I wrote before, try applying this Resolution Foundation Rawlsian’s definition of fairness to your personal life, say splitting a dinner bill, and you will quickly see justice is much more than distribution.
From both an international perspective and an inflow-outflow perspective, the UK is just in not a particularly bad position. UK pension expenditure is expected to grow both below the OECD average and a quarter of that of Spain’s – a country where unfunded pension obligations total 500 per cent of GDP. As for inflows and outflows much has been made of people paying “£82,560 in and getting £158,040 back” but it is an entirely reasonable expectation – you’d need your £2,064 annual inflow to compound at just 3% to get it.
That really is the failure of British pension policy – not the absence of means-testing, not outsized outflows, not arbitrary locks – is the failure of previous generations to plant trees under whose shade they shall never sit.
Other countries in the 80s and 90s, realising they were in the midst of a demographic dividend, squirreled it away into trust funds. Britain did not and it is going to pay that price for some time to come. It is however something fixable – and without needing the kind of hit and run approach to political capital that the means-testing squad keep calling for. What we ought do then is what the Canadians did – to start moving towards partial advanced funding. Saving a bit more today, and investing it, so we need contribute much less tomorrow.
Anything else is just a distraction.