The state pension triple lock should be dropped, the work and pensions select committee of MPs has argued.
Announcing the results of its inquiry into inter-generational fairness, the committee said that while the triple lock – which has uprated the state pension by the highest of inflation, earnings or 2.5 per cent every year since 2012 – had “made a valuable contribution in increasing the relative value of the state pension”, it would cost too much to maintain.
The report reads: “Its retention would…tend to lead to state pension expenditure accounting for an ever greater share of national income. At a time when public finances are still fragile, this is unsustainable.”
It adds: “The retention of the triple lock would not be intergenerationally fair. We urge political consensus before the next general election on a new earnings link for the state pension.”
After being re-elected last year the Conservative government pledged to retain the triple lock until 2020. The policy has ardent supporters including former pensions minister Steve Webb, but has been opposed by others including the immediate former pensions minister Ros Altmann.
State pension expenditure is currently around 5.5 per cent of GDP. Without increasing the state pension age any more than is already planned, the Office for Budget Responsibility predicts this will rise to 8 per cent by the mid-2060s.
The committee recommends replacing the triple lock with an earnings linked system.
The report says: “We recommend the Government benchmark the new state pension and basic state pension at the levels relative to average full-time earnings they reach in 2020. The triple lock should then be replaced by a smoothed earnings link.”
The committee adds that indexation should still protect pensioners from the impact of inflation however.
It adds: “In periods when earnings lag behind price inflation, an above-earnings increase should be applied to protect pensioners against a reduction in the purchasing power of their state pension. Price indexation should continue when real earnings growth resumes until the state pension reverts to its benchmark proportion of average earnings. Such a mechanism would enable pensioners to continue to share in the proceeds of economic growth, protect the state pension against inflation and ensure a firm foundation for private retirement saving”
— Work & Pensions Ctte (@CommonsWorkPen) November 6, 2016
AJ Bell senior analyst Tom Selby says that the future of the triple lock looks “bleak” in light of the committee’s findings.
He says: “Margaret Thatcher’s decision to scrap the earnings link for the state pension in 1980 was seen by many as an attack on pensioners. The triple lock has at least partly restored some of the value that was lost during that 30-year period. However, it was never meant to be a permanent measure and costs the Exchequer billions. The Government will be wary about hitting pensioners ahead of the 2020 election – and breaking its manifesto promise in the process – but beyond that the triple-lock’s future looks bleak.”
However, Hargreaves Lansdown head of retirement policy Tom McPhail notes that politicians will be way of ditching the triple lock for fear of losing votes from retirees.
He says “Politicians are chronically compromised when making any policy decisions which might be detrimental to older citizens. You only have to look at the turnout in general elections to understand why: 78 per cent of the over 65s voted, compared to just 43 per cent of the eligible under 25s. The triple lock has served an important function in bringing pensioner incomes back into line with the rest of the population.”