Friday 9 October 2020 4:58 am

The pensions triple-lock is unjustifiable in normal times — in the Covid era, it is utterly unconscionable

Imagine you a Conservative chancellor trying to steer the economy through the midst of the worst pandemic in modern history.

You have done your best to protect jobs and support struggling businesses in the face of drastic lockdown restrictions, while tax receipts shrivelled and the healthcare bill has ballooned beyond all previous measures. Despite your best efforts, the country is facing job losses that number in the millions, and the national debt has exceeded GDP for the first time in 50 years.

The upcoming recession is predicted to be on a level not seen since the eighteenth century.

Read more: HSBC’s looming pensions crisis: will the bank win the battle but lose the war?

The shutting down of whole swathes of the economy has been necessary to stop the spread of a virus that has killed over 50,000 people in six months. A staggering number — but those deaths have not been evenly spread. The latest figures from the Office for National Statistics show that almost 90 per cent of casualties have been aged 65 and over, while 80 per cent have been over 75. The country has come together and suffered immense sacrifice for the protection of a small but vulnerable older minority.

All well and good. Economic hardship, after all, pales in comparison to the value of saving lives.

But now hard choices lie ahead. The vast costs of handling this crisis — estimated at £210bn for the first six months alone — will need to be paid for. The support offered to businesses and workers who saw their finances upended by lockdown is being wound up, the temporary increase in Universal Credit for hard-hit families is being reversed, and every area of government spending is under review. 

What should you prioritise?

The answer, if you are Rishi Sunak, is giving pensioners a pay rise.

And not just any pay rise: a pay rise that, due to the distortions of the heralded “triple-lock”, could outstrip wage growth by a multiple of five.

While the triple-lock is now considered a sacrosanct and untouchable policy that is the fundamental human right of any Brit above retirement age, it is actually a recent initiative, brought in by the coalition government in 2010. Designed to ensure that the state pension was not overtaken by inflation, it commits to raising it in line with one of three metrics: average year-on-year wage growth, price growth, or a fixed rate of 2.5 per cent — whichever is higher.

The idea behind the triple-lock is sound. Due to the policies of the 1980s, pensions had fallen significantly compared to earnings and there were acute fears about pensioner poverty. Ensuring rises were not wiped out by inflation was a worthy goal. 

But the way the  mechanism works exploits wage volatility — at the expense of the workers who are actually paying for the pensions of the generation above.

Even in normal times, it means that pensions are protected when wages fall, but benefit when they rise. And these, as we are repeatedly reminded, are not normal times.

Lockdown and the furlough scheme (which saw nearly 10 million workers take a 20 per cent pay cut during the peak of the pandemic) are set to have a sizeable impact on average wages this year. But while workers will have to suffer a pay cut, the triple-lock ensures that pensioners will enjoy a 2.5 per cent rise. 

Next year, wages are expected to bounce back up — amounting to a five per cent increase, according to the Office for Budget Responsibility’s July forecast. This doesn’t actually represent a raise in any meaningful sense, as it will simply be returning wages to their pre-Covid levels, with a modest 1.5 per cent boost over two years. But the magic of the triple-lock means that pensions are set to enjoy that bounce-back increase too, despite never having fallen.

This would amount to an increase in the state pension of around 7.5 per cent over two years — five times the boost to average wages, and three times the predicted 2.5 per cent inflation rate. 

This is not about ensuring that pensions are cushioned from inflation — according to analysis from AJ Bell, “by 2024/25 the triple-lock is expected to cost £6bn more than a straight CPI inflation lock and £3.2bn more than a lock to average earnings”. Rather, the confirmation from the chancellor this week that the triple-lock would not be scrapped or even reconsidered in light of the circumstances is a cynical political move to avoid the wrath of the pensioner cohort, who argue that they are entitled to such disproportionate increases, regardless of the consequences.

It is difficult to see how boosting pensions by five times more than wages would be justifiable in ordinary times. It is particularly indefensible now, as benefits for workers are pared back, on the brink of an economic crisis that is disproportionately hitting the young.

The impact of the pandemic and lockdown will scar today’s young people for the rest of their working lives. Job losses have been centred on entry-level roles and in industries overwhelmingly staffed by the young (hospitality, retail and leisure). Repeated research has shown that pay cuts early on in an individual’s career reduce their earning potential for decades — according to the Institute for Fiscal Studies, “the Covid-19 pandemic has severely dented the career prospects of young people and threatens to have a prolonged negative economic impact on them as a result”.

Add to this the crushing weight of the national debt that younger generations will be paying off for years, the crippling impact of youth unemployment, and the sharp reduction in job opportunities, and the future looks bleak. Any government remotely interested in generational equality or social mobility should be prioritising the “Covid cohort”, ensuring that their life chances are not utterly annihilated and that the high economic and social price they have already paid for their elders is recognised.

Instead, the government has shied away from the debate, once again demonstrating that there are no limits on what it will ask the nation’s young to sacrifice for the sake of the old.

Read more: For young Londoners, working from home is a cramped and dismal experience

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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