On a list of the biggest controversies of 2023, you could well find “the increase in pensioner incomes relative to everyone else’s”. When times are hard, issues of fairness come under scrutiny.
The way the state pension rises is through something called the “triple lock” mechanism. Under this mechanism, the state pension will increase by whatever is highest: inflation, earnings growth or 2.5 per cent each year.
This policy has had more than its fair share of time under the fairness microscope.
Let me start by saying I support rises in the state pension that in some way keep up with rises in living costs and earnings across the rest of the population. To not do so would condemn pensioners – current and future (especially future, in fact) – to lower living standards in later life.
So I have supported the triple lock. In the absence of a viable alternative that can do the same job (or better) of giving certainty to those giving up work when they get older, the triple lock is the best and only method we’ve had.
I have been extremely nervous about talk of scrapping it; of fuelling intergenerational warfare around it being unfair for pensioners to get rises in income but not working people; of anything that might do away with an artful piece of policy that has pulled millions of pensioners out of poverty over the years. Let’s not learn the hard way that one thing society doesn’t need is millions more old people stuck in poverty.
But its cracks have been exposed lately, through some quite significant, post-pandemic, bonkers-economy-related rises with inflation (10 per cent this year) and earnings (8.5 per cent next year).
To be fair, no one would have seen these kinds of readings coming – the lock was devised at a time of relatively benign economic conditions, when fluctuations of any economic measure beyond 2 per cent caused palpitations.
Tied to extraordinary data, the recent whacky rises in the state pension have not only dwarfed any increases that working tax-paying or benefit-receiving households have benefited from over the past couple of years (they’ve had tax rises, mortgage rate and rent rises to contend with, too). These rises have also caused justifiable questions to be raised over the sustainability of the triple lock as a mechanism for rises.
As I have already said to my children at least once while looking at their Christmas lists: “Guys, we just can’t afford it.” And so is the plain and simple truth with the current state pension cost forecasts.
Santa can’t come to the rescue here. Something must be done. There has been talk of double locks or single locks, linked to earnings, price rises or both, and scrapping the 2.5 per cent bit of the lock – so that in years where either is lower than 2.5 per cent pensioners do not get more.
There has been talk of using “smoothed measures” of average inflation or earnings over agreed time periods, not just linked to a specific month the year before the pension change is due, which exposes the mechanism to randomly high readings, as it has done lately. There is still merit in discussing these tweaks rather than wholesale reform, even in the short term.
Beyond these tweaks to the lock system, the alternatives so far proposed for fundamental overhaul have been unpalatable: means-testing the state pension – which is ok in theory but a nightmare to enact – and increasing the state pension age faster and further than planned, even without rises in longevity.
To varying degrees, the potential for upset, outrageous inequality and further hardship abound with these two choices. The “social contract”, that sacrosanct understanding that we support the old now because one day, it will be our turn, would lie in tatters.
Now, the clever thinkers at the Institute for Fiscal Studies, have come up with a proposal that is both blue-sky and very down-to-earth. It’s called a four-point guarantee, but I will spare you all the points because arguably the first criticism of it is that it requires consideration of four factors, not just three, as the triple lock asks of us.
Basically, what it requires is an agreement for a target proportion of average earnings that the state pension income should represent, then phase in this amount. So an earnings link, but a different kind of earnings link to what we have now. Then inflationary rises to keep it meaningful.
So an inflation link of sorts, too. The state pension won’t be means-tested and rises in the age you get it would only be in line with our lives getting longer. This guarantee may not be less complicated than the triple lock; it might even be harder to understand. Setting that target in the first place could be so controversial it might never happen.
But if it could do what it promises, which is give more certainty and avoid the horrible alternatives; if it could achieve something truly heroic: a sense of fairness, then we wouldn’t feel a need to understand it anyway. Because it would work and we’d be happy with it.
The importance of certainty can’t be overestimated. PensionBee’s own Pension Confidence Index found that faith in the state pension was crucial to people feeling positive about their pension outlook, while distrust in it also a key reason why people feel negative.
If enacting such a proposal would mean that everyone stops stressful talk about scrapping the triple lock, or manipulating the state pension out of meaningful existence, this would be a huge win.
Becky O’Connor is Director of Public Affairs at PensionBee.