Your reaction to this week’s debate may very well depend on how old you are. Or possibly how rich you are. In case you hadn’t already guessed, I’m talking pensions. The government has decided to restore the so-called “triple lock” and that means that the 12 million people drawing the state pension will soon be getting a much bigger increase than they’ve become used to. Is that economically sensible in this time of high inflation? Is it fair?
The triple lock was Introduced in 2010. It guaranteed that the state pension would rise every April by whichever was highest: consumer price inflation the previous September, annual wage growth the previous July, or 2.5 per cent. When Rishi Sunack took over at the Treasury he announced that things would change. Under the old rules pensions would have risen by more than 8 per cent last April because that was how much pay had risen on average the previous year. But that, he pointed out, was because of the effect of Covid and the furlough scheme. So instead he ruled that pensions and benefits should instead increase by last September's rate of inflation. The triple lock was suspended. Now it is being reintroduced. But of course a lot has changed since last April.
Inflation, which had been limping along for several years, is galloping away. It’s now in double-digit territory, which means pension increases of at least 10 per cent. And that, say many economists, is simply unsustainable. It has already pushed up the interest bill on Britain's £2.4 trillion national debt pile to £7.6 billion in just one month. That’s £245 million every day. And it’s getting worse. Danni Hewson, an analyst at the investment platform AJ Bell, said: 'Any household poring over their own books will know that a budget that's still got more going out than coming in is one
One of the most respected think tanks in the country, the Institute for Fiscal Studies, has described the pensions increase as 'unsustainable in the long run'. Its director Paul Johnson was already on record as saying pensioners have benefited from an “amazing” period of rising living standards relative to the rest of society. This week he called it a “bizarre” way of making sure pensioners do not fall too far behind. “You can deliver what you want without having this random and rather expensive policy over the long run,” he said.
He's not alone in that view. A former senior Conservative Treasury minister, Lord O’Neill, told Radio 4's Today programme that “the constant protection of pensioners seems ludicrous in itself”. Doing so while forcing real-terms pay cuts on public sector workers was “particularly crazy”. Asked why pensions were rising in line with inflation when ministers were urging public sector pay restraint, Lord O’Neill said: “I have no idea. It seems to me pensioners, given the pressure on fiscal policies and inequalities, the constant protection of pensioners seems ludicrous in itself and in these circumstances particularly crazy.”
He accused the government of “jumping from one policy and seemingly trying to pander to everyone’s whims”. He warned that people in work will have to pay more tax to fund the pension increase. What was needed, he said, was “a clear and articulate policy framework ... and we don’t have one”. He also said it was “crazy” to protect pensioner incomes while younger people’s wages were being eroded by the highest inflation rates for 40 years. The policy was also criticised by the former Chancellor Kenneth (now Lord) Clarke. If the government needed to “protect the poor”, he said, it would stop giving people like him £300 to help with spiralling gas and electricity charges.
Rishi Sunack rejects the claim that giving pensioners such a large increase will stoke the fires of inflation. He argues it’s not the same as giving workers large pay rises because that simply encourages other workers to ask for even more. Instead, he says: “It’s right that we reward our hard-working public sector workers with a pay rise, but that needs to be proportionate and balanced with the need not to make the inflationary pressures worse and also to see what’s affordable for the taxpayer.
Whatever the effect on the economy of giving pensioners large increases, many people will take the view that the real question is the most simple one: do they need it? That question has been addressed by the Organisation for Economic Co-operation and Development, an international organisation comprising 38 developed countries. Its research suggests that one fifth of adults retiring in Britain this year are planning to rely on the state pension as their main source of income and Britain has one of the highest numbers of pensioners living in poverty of any country in Europe. The state pension in the UK is one of the lowest in Western Europe. The proportion of pensioners with an income below half the average is said by the OECD to be 15.5 per cent. In Italy it is 11.3 per cent, in Germany 9.1 per cent, and in France 4.4 per cent. So it seems not to be true that British pensioners are feather-bedded. The OECD reckons that in 2017 (the latest year for which figures are provided) we spent slightly less on state pensions as a proportion of gross domestic product than in 2010.
It's true that the introduction of the triple lock has raised pensions over the years, but in April this year they rose by only 3.1 per cent even though inflation was already approaching 9 per cent. Which means, obviously, that people relying on a state pension to make ends meet will be poorer than they were 12 months ago. The case for the return of the triple lock was made in the Daily Mail by Stephen Glover. He wrote:
“Surely a decent society should care for its older citizens, nearly all of whom have paid taxes and national insurance over many decades. They are, furthermore, potentially more vulnerable to the surge in the cost of gas and electricity than younger people, who are supposedly physically more robust. I've heard a lot of nonsense over the past 24 hours about how the Government is widening the 'generational divide' by increasing pensions in line with inflation. No, it is merely honouring its promises to a group of people who need help. That's not to say that the young don't have their own legitimate gripes. Nor does it make sense to compare pensioners with rail workers, who are being told by ministers that they should accept much less than 10 per cent. Rail workers receive an average salary of £44,000, according to the Government, while train drivers pocket average annual pay of £59,000.”
So where do you stand in this debate? Does it really make sense to use taxpayers’ cash to give bigger pensions to the many relatively wealthy pensioners (and, yes, I include myself in this category) who can manage perfectly well without it? After all, it’s not as though the state’s coffers are overflowing following a ruinously expensive pandemic. In fact, the nation is broke. And it’s not as though we can’t all think of a dozen worthy recipients of state spending. What about schools? What about hospitals? What about funding great projects which will create employment, increase productivity and make this country richer for generations to come?
Or maybe it’s time to think the unthinkable. Should we apply a means test to the state pension? Should we pay less to the rich and more to the poor?
Let us know.