George Osborne promised last week to legally bind future governments into lowering debt. Thanks to one of his own policies, that debt ambition will be much harder to meet unless reforms are undertaken today.
The problem is the “triple lock” on the basic State Pension, the main benefit for retired people which is received by nearly 13m people each year. The triple lock uprates the State Pension annually by whichever is highest: growth in average weekly wages, the consumer price index (CPI) measure of inflation, or 2.5 per cent.
The price is considerable in the short and long term. The policy will cost £4.6bn in 2015-16, equivalent to nearly half the annual expenditure on the police. That cost will become eye watering in the future as the population ages. By the time the last batch of millennials retire, in the second half of the century, it will have increased government debt by 26 per cent of GDP. For comparison, that debt currently stands at around 80 per cent.
The argument against the triple lock is not simply about cost, however. It is about how spending is allocated. Historically, there was a rationale for increasing transfers to pensioners. In the early 2000s, a quarter of pensioners were still in poverty. The introduction of means-tested benefits has made a great difference, roughly halving this figure. In fact, average pensioner incomes are now higher than non-pensioner incomes, when housing costs are taken into account.
The triple lock does have some desirable features. It protects pensioners against inflation and maintains a link between pensions and increases in wages. However, as Reform sets out today, these objectives could be achieved without much of the associated cost.
The government should replace the triple lock with a “relative earnings link”, on the model of the Australian welfare system. This ties the State Pension only to a proportion of average weekly wages, judged in the medium term. This would deliver pension rises at above earnings growth during economic downturns, and this generosity would be clawed back when the economy is recovering. Such protection is particularly important given pensioners’ relative inability to respond to economic shocks by re-entering the labour market.
Osborne wants to bear down on welfare for working age people rather than on pensions. Indeed, there are clear opportunities to save on working age welfare, notably further cuts to the child benefit received by middle class families. He should nevertheless look for balanced reductions across the whole budget, including pensions.
It should, of course, be recognised that pension changes are tough politics for the new government. Seventy-eight per cent of those aged over 65 voted in the general election, according to pollster Ipsos Mori, compared to just 43 per cent of 18 to 24 year olds. Pandering to older voters is almost irresistible for political parties. However, the government will find it much easier to tackle the UK’s fiscal problems if it ditches the triple lock.