The Week 15 September 2023

This week in Westminster has mostly been about the 3 Cs — concrete, China, and Channel crossings. At?Reform,?we’re squarely focused on another one — (party) conferences — which are only two weeks away: scroll down to catch a sneak preview of our full programme of conference events! On the policy front though, we’ve seen the pensions debate unexpectedly burst into life this week…

It all started with?this?IFS report published last Saturday, discussing the ‘triple-lock’ on state pensions. As a reminder, the triple-lock — first introduced under the Coalition in 2011 — ensures that the annual increase in the state pension will always be at least 2.5%, or otherwise pegged to whichever is running highest out of inflation (using CPI) or average earnings growth. So, for example, in 2015, with CPI at 1.2% (imagine!) and earnings up just 0.6%, state pensions were locked to the 2.5% increase instead.

In practice, it’s proven a remarkably generous deal for pensioners. With the introduction of the new state pension in 2016 — accessible to men born after April 1951 and women after April 1953 — pensioner benefits are now much closer to the level of average pay in the wider population. According to the IFS, as of 2022, the state pension is “worth almost 25% of average full-time earnings, the highest level since 1980 and close to its record high as a fraction of earnings.”

But, of course, this comes at a significant cost to the state. The same analysis shows that the triple-lock has imposed an extra ￡11 billion on government spending every year. As a result, despite its appeal to an age group (one which, it should be noted, reliably turns out to vote), the triple-lock has come into question. Last year, the Government suspended it on a temporary basis, after average earnings spiked at 8.6%. CPI (running at 3.1%) was used to determine the level of uplift instead.

The bigger insight here is the IFS’ modelling of the future burden on government spending. They suggest that a reasonable estimate of extra spending on the state pension by 2050 (“taking place 80% of the time”) is between ￡5 billion and ￡45 billion. If government stuck to this, they argue, it could lead to “insurmountable pressure for a much higher state pension age”.

The long-term case against the triple-lock is pretty well established. Indeed, even in the short-run (by 2025), interesting analysis from?The Times?in August?found?that the state pension could cost government more than the day-to-day budgets of the DfE, MOD and Home Office combined.

As usual in our political system though, the short-term is what’s really driving change. With the rise in annual earnings announced this week (8.5%), there’s speculation the Treasury might seek to avoid sticking with the triple-lock again and instead offer a lower annual rise instead.

This is fiscally sensible, given spending pressures elsewhere. But it might also be the final nail in the coffin for the triple-lock — a policy designed to address short-term priorities without considering the possibility of radically different economic conditions (see 2022; 2023) making it unaffordable. With neither Labour nor the Tories apparently willing to offer a long-term commitment anymore, is this the beginning of the end for this boon for pensioners? Perhaps short-termism has accidentally aided the quest for long-term, tough decisions.