The last 24 hours have seen the issue of pensions come to the fore in the UK General Election debate. Much of this was triggered at Prime Ministers Questions yesterday.
Theresa May has refused to commit a Conservative government to retaining the “triple lock” on pensions during a boisterous final session of prime minister’s questions before the election. ( Financial Times).
For those unaware of what it actually means the FT helps out.
which increases the basic state pension by the highest of three indicators: consumer price inflation, average earnings growth or 2.5 per cent.
This policy has had consequences which I will look at in a moment and the Prime Minister did refer to one of them although care is needed with any number provided during an election campaign by a politician.
The prime minister also referred to the triple lock in the past tense, saying it “had” boosted incomes by £1,250.
She presumably means per year.
The cost of the Triple Lock
Back in September 2015 the Government’s Actuaries released a report stating this.
A hastily buried official report has estimated that the government is spending an extra £6bn a year protecting pensioners’ incomes and warns that the cost of doing so in future years could spiral further.
What this has done at a time of claimed austerity is to put pressure on the UK public finances.
The GAD report said the triple lock was already costing around £6bn a year, with £70bn in total spent on the state pension in 2015/16 — more than the combined education and Home Office budgets.
Also it had been in play at a time when real earnings growth has been weak which led to this.
The government report said that since 2010, the guarantee had meant that pensioners’ income was £10 a week higher than it would have been had their income been uprated by earnings alone.
So there had been a transfer from workers to pensioners. If we move to last November the Parliamentary Work and Pensions Committee updated us on the state of play. From the BBC.
As a result of triple-lock policy, the state pension has risen by a relatively generous £1,100 since 2010, with an increase of 2.9% in April this year.
The Committee concluded this.
However, MPs said that while pensioners had done well out of the triple-lock, young people and working-age families had suffered unfairly.
So-called Millennials, born between 1981 and 2000, face being the first generation in modern times to be financially worse off than their predecessors, they added.
MPs said the rising cost of the state pension – £98bn in the last tax year – was now unsustainable.
The Triple Lock has achieved its target
The rationale for the Triple Lock was explained by the BBC.
Historically, pensions were linked to inflation rather than earnings, which reduced pensioner incomes relative to those of the working population.
The economic objective was to bring them more into line and of course there was a political aim as part of this as pensioners are the group most likely to vote. But if we look at what happened next we saw a combination of circumstances and indeed a Black Swan event. Step forwards the Office for Budget Responsibility!
Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.
In this world pensioners would see incomes rise with average earnings and there would be no transfer from workers. We are of course reminded of my first rule of OBR club ( which is that the OBR is always wrong…) as the Work and Pensions Committee moves us from Ivory Tower fantasies to reality.
Low rates of earnings growth following the 2008–09 recession
This means that in reality the increases have been driven by consumer inflation and the 2.5% back stop more than earnings.
The BSP ( Basic State Pension ) was uprated in line with CPI in 2012–13 and 2014– 15, earnings growth in 2016–17 and the 2.5 per cent minimum in 2013–14 and 2015–16.
The Black Swan event was the drop in official consumer inflation to in essence 0% which impacted on the 2015/16 numbers which again brings us to the first rule of OBR club as of course it assumes 2% inflation until the end of time.
The irony of all this is that the original objective is in sight.
Provided the new state pension is maintained at this proportion of earnings the work of the triple lock, to secure a decent minimum income for people in retirement to underpin private saving, will have been achieved.
However there has been a cost to this.
Reform, a think tank, estimated that the triple lock will in 2016 result in annual state pension expenditure £4.5 billion higher than it would have been had a simple earnings link been in place. This gap can only grow.
The rising state pension age
One area that is awkward is the way that current pensioners benefit from the Triple Lock but future pensioners find that the system looks increasingly unaffordable and of course they have to wait longer to get theirs. Last Month Retirement Genius reported this.
John Cridland, the independent reviewer of the state pension age, made three key recommendations.
First, that the state pension age should rise from 67 to 68 by 2039, seven years earlier than currently timetabled…..The second report by the GAD presented a scenario of faster rises which could see those aged under 30 only having access to the state pension by the age of 70.
So there was potentially grim news for Millennials who seem only to get bad news don’t they?
Should we take it away from the well-off?
This suggestion has been floated in the Financial Times today.
The UK should not give a state pension to the rich and instead use the money to boost payments to the poor, the OECD has said. The Paris-based club of mostly rich nations said cutting payments to the wealthiest 5-10 per cent of retirees would “free up resources” to raise British pensions, which are low compared with other wealthy nations, for others.
An interesting idea and considering its readership group it is brave of the FT to print this! Whilst in itself it seems to have things in its favour (redistribution) there are catches. For example higher income groups will be paying income tax on this and sometimes at higher rates of it. Also there is the belief that this is a system that is paid into and we are excluding the group who in general will have paid the most. Of course reality is not like that as they paid in fact for their predecessors pensions but even so it is a little awkward.
There are various issues here. The first is the irony that the Triple Lock is under fire for in essence doing what it was aimed at which was pensioner poverty. It is not a cure but it has helped by raising the Basic State Pension. The catch has been the economic environment where low rises in real wages have combined with the choice of a 2.5% back stop to the increases have made it not only increasingly expensive but also the equivalent of throwing the Ring of Fire into Mount Doom to the forecasts of the OBR Ivory Tower.
So we have an issue of possible failure by success and if it has been that then it was the 2.5% back stop which has caused it combined with other choices such as limiting other benefit increases to 1% per annum. It is a complex mixture which looks unfair basically because it is.
We also live in a world where there are so many ch-ch-changes to state pension entitlement and whilst going forwards the state pension was raised a year ago there was a catch which resonates with me.
One of biggest changes to state pension in 2016 was scrapping of right for spouses to inherit partner’s pension when they died. ( Josephine Cumbo )
This is because when I sorted out my mother’s financial affairs after my father’s death she benefited from inheriting some of his state pension.
They seem to be doing okay as this tweet about the retirement party for the Director of the Tate Gallery Sir Nicholas Serota suggests. The asterisks are mine.
Lots of Tate staff are outsourced, low-waged and/or on zero hours contracts. Tate are asking them to help buy Nick Serota a f**king yacht. ( @charlottor )
Me on Official Tip TV