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I thought it notable there wasn’t more pushback in the comments last weekend, when I cited a growing consensus that something must be done about the pension triple-lock.
A few of you raised thoughtful questions, mostly about what really drove the convergence of pension-age income with that of the rest of the population.
But there were no pitchforks, no curses. No shaking a fist at the unfairness of it all.
With hindsight, this eerie quiet further suggested that most of us can see the pension triple-lock is fair game – unsustainable in its current form.
And sure enough, on Tuesday the Prime Minister pulled the bandaid off.
The triple lock would be tweaked to reduce its long-run cost, Andy Burnham said, and any savings used to fund later life social care.
Triple-topped
As the BBC recaps:
The triple lock was introduced in 2010 by the coalition government and designed to ensure the value of the state pension was not overtaken by the increase in the cost of living or the incomes of working people.
It means the state pension rates rise every April by either inflation, earnings growth or 2.5% – whichever is the highest.
Burnham said this will stay in place until 2030, at which point he would like to “adjust it”.
He said: “The state pension will continue to rise every year at least by prices or 2.5%. And it will hold its value relative to earnings over time so that pensioners will always share in the rising prosperity of the nation.
But this change will generate significant savings which we will use to build up our national care service.
Some may not realise it but older people with nothing more than the state pension, or only a little more, can find themselves paying care charges today from that small income. Under my plan, this will no longer happen.”
On first blush it looks a sensible compromise. I think most people support a reasonable State Pension, if only because we’ll benefit from it ourselves.
But its ‘every way’s a winner’ ratchet made the old triple-lock system increasingly unviable. It’s already forecast to cost around three times as much by the end of the decade as originally expected.
Burnham’s tweak should reset the built-in escalation. According to the IFS:
The new, reformed version of the triple lock still contains three parts.
Inflation, earnings growth and 2.5% are all important.
But the new mechanism means that each year the state pension will instead increase by the maximum of:
- CPI inflation
- 2.5%
- the amount needed to ensure the state pension keeps up with average earnings growth since the introduction of the new policy.
Essentially Burnham is saying enough is enough on the catch-up we saw last week. The new tweak effectively cements the status quo, relative to average earnings, in the long run, while still providing protection against everyday inflation.
Here’s an illustrative scenario:
Source: IFS
Sense and sensibility
At first blush it looks like a good change to me.
The old mechanism was becoming too expensive. This new triple-lock will still protect the real value of the State Pension – and it will still be increasingly costly to fund. But the revised link with average earnings at least ties that cost implicitly to the taxes that will pay for it.
The tweak also seems like a pragmatic one – announced without bombast, a sensible timeline to delivery, and made in the face of some political risk.
Finally, funding social care for the elderly is a huge issue, as anyone who worked through my co-blogger’s deep dive a few years ago knows.
I don’t like the means-testy sounding way that Burnham is pitching his fresh look at the issue. Ideally I’d prefer some kind of paid-in insurance system that meant everyone would get to live in a care home for free in the end if they needed to. This would remove the lottery element to end-of-life planning, making it much easier to save (and spend) accordingly.
But at least it’s a real and weighty problem to tackle, unlike the phoney wars of the past decade.
Obviously it’s too early to declare that UK politics has returned to a reasonable centre ground. But might this too be a tweak in the right direction?
Have a great weekend!
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Aged Monevator reader here (now 80 as is wife)
From a longer perspective that some here it’s obvious that we are currently on an unsustainable financial path at the moment so……..
As a private sector worker all my life I never counted on State Pension for my retirement-it’s been a nice bonus that’s now coming to an end
(Taking SIPPs into the IHT rules also couldn’t be argued with -pensions are not a vehicle for wealth transfer)
U.K. State Pension is not excessive compared with other Western countries but is any of it sustainable
Tougher financial times ahead for all of us as the noose tightens !
xxd09
I certainly agree that the new tweak is a sensible step in the right direction. The most disappointing element for me is the retention of the 2.5% lock. I’ve never understood this one and would love to see it go. It’s just so arbitrary and there’s no possible logic behind it. If it were up to me I’d have it go up by the higher of either the amount needed to keep pace with inflation since the policy was implemented, or the amount needed to keep pace with earnings since the policy was implemented.
Completely agree with the comment from Weary Worker above. Where did the 2.5% element of the triple lock come from? Is there a significance to 2.5%, or is it just an arbitrary number?
The tweak is a reasonable one. Let’s not forget why the triple lock was introduced. The state pension had eroded to the point that they were 16% of average earnings and the lowest in Europe. Even now they are low compared to other developed Western countries. My experience is that everyone is better off now than several decades ago. Remember people driving rusty old heaps of a car? DIY keeping them going? Remember when foreign holidays or eating out were a luxury? Mum’s making clothes for their kids? etc etc.
Pensioners have no way to increase their incomes, they have no options. They’ve worked and paid taxes all their lives in order to qualify for their pension.
Yes the triple lock is unaffordable because successive governments have spent the money paid in to sustain them. Peoples standard of living has improved at the cost of services. How is education, armed forces, policing, roads, NHS, etc etc doing? Abysmally.
If there are any ‘patriots’ left, perhaps they should be happy to pay a bit more in tax to get the country back on its feet, and to sustain the triple lock.
Rant over, for now.
Considerable political risk with changes to pensions, I have advocated keeping the triple lock with a longer period of rolling averages to avoid the ratchet effect heads I win, tails you lose each year.
A while back I played with ChatGPT and came up with this , my favourite theory didn’t work out saving much !, a 5% cap each year helped.
Apologies for the formatting but the numbers are interesting.
By 2030, starting with £100 in 2011: to 2030 projected
Triple lock
£210.87
Compared to;
Five-year rolling averages
£204.71 (-2.9%)
Five-year rolling average with a 5% cap
£201.25 (-4.6%)
Earnings only
£183.25 (-13.1%)
CPI only
£174.11 (-17.4%)
Re: Weary Worker, Mirror Man
I think the 2.5% was just a simple way to have pensions gradually recover ground lost vs inflation and wages over the previous few decades. Given that Triple Lock V2.0 is explicitly NOT trying to ratchet up vs wages, it now seems redundant.
Is there really that much political risk with the pension triple lock ? I would get rid of the 2.5% element too. I think perceived unfairness is the key issue, particularly people gaming welfare, disability etc generally.
I’ve always assumed that the 2.5% increase was included to ensure that no government ever again suffers the flak received by Chancellor Gordon Brown in 1999/2000. This was at a time when the state pension increase was based on RPI inflation only. The September 1999 RPI increase, on which the April 2000 pension increase was based, had dipped to 1.1% with the result that the pension increase was only 75p/week.
Google AI, which confirmed the details of the basic facts for me, also suggests this was the reason for 2.5% being included in the triple lock.