Published by William Mosseri-Marlio on 16 June 2016
- Our Work
- The Reformer Blog
12 June 2015
At the heart of the Conservatives’ general election pitch to the grey vote was a commitment to maintain the triple lock, a mechanism that ensures the State Pension grows in line each year with the highest out of CPI inflation, wage growth or 2.5 per cent.
The previous Labour administration had committed to move from an inflation linked State Pension to earnings indexation by 2012, ensuring pensioners would benefit from the prosperity of the working age population. To this the triple lock adds protection against inflation during periods of negative real wage growth, and an assurance that each year would see meaningful rises in the State Pension.
However initial estimates of the cost of the triple lock have proved inaccurate. When first implemented in 2010, the policy was forecast to be only marginally more expensive than pegging the State Pension to earnings growth. After all, nominal wage growth (roughly 4 per cent) typically outstrips CPI inflation (targeted at 2.0 per cent) and 2.5 per cent during periods of prosperity. Indeed, prior to 2007, the last time earnings growth dipped below either inflation or 2.5 per cent was in 1992-93, when the UK was in recession.
But above target inflation and anaemic wage growth has meant 2016-17 is expected to be the fifth successive year in which the Basic State Pension will have appreciated faster than average wages, with a cumulative difference over this period of 8.2 per cent. In 2015-16 alone, the cost of the triple lock relative to earnings indexation was £4.6 billion.
These unexpectedly high outlays prompted the Office for Budget Responsibility (OBR) to revisit its long term modelling of the triple lock’s cost in 2012, 2014 and 2015. The changes have been significant. When applied to the most up to date projections of State Pension expenditure, the gap between the 2011 and 2015 models by 2064-65 is 0.6 per cent of GDP, a figure greater than the current budget for the Department for Energy and Climate Change. In part because of these revisions, the Chairman of the OBR Robert Chote yesterday argued the triple lock puts “systematic upward pressure on pensions spending as a share of GDP”.
Of course, these are just projections. Uncertainty over extended time horizons is significant, and modelling changes in themselves do not cost the Exchequer money. However the OBR altered its forecasts precisely because the facts on the ground have changed in the short term. It also means policymakers entered into the triple lock with a view of the policy’s cost we now think is inaccurate.
This does not detract from the fact that the Coalition was right to protect pensioners against inflation as well as ensure they benefit from the prosperity of the working age population. But the triple lock creates a ratchet effect that is unnecessary to achieve these policy objectives. The Department for Work and Pensions could peg the State Pension to a proportion of average earnings in the medium term, whilst also delivering rises in line with inflation during periods of negative real wage growth. This ‘relative earnings link’ – already implemented in Australia – would secure the policy objectives of the triple lock, without the associated costs. As the Chancellor tries to get the UK’s finances back on track, he should heed Mr Chote’s warning and scrap the triple lock.
William Mosseri-Marlio, Researcher, Reform