A triple lock is irresponsibly expensive
Nigel Williams, 7 January 2014
As a first move in the 2015 election campaign, David Cameron has announced that the triple guarantee will, if he gets elected, continue to apply to the Basic State Pension. It looks like a clever move, because pensioners vote in greater quantities than the young. The triple guarantees for pensions and for working-age benefits show marked differences. Whatever happens to indices of inflation or earnings, pensioners get a guaranteed minimum of 2.5 per cent, whereas benefits are capped at a maximum of 1 per cent. Each year the gap will widen.
There is a problem of definition regarding pensioners. They are both a welfare payout and a contract. It can be argued that National Insurance contributions over a working career are ample to provide a reasonable pension until death, so the person retiring after years of continuous employment, who has few options left for earning any extra, feels entitled to carry on drawing it to the full. On the other hand, the National Insurance contributions were not retained in a ring-fenced fund, but spent by the governments today’s pensioners voted for in the past. National Insurance has long been treated as general taxation, serving to keep other tax rates, especially Income Tax, low. For the duration of pensioners’ working careers, their National Insurance has protected them from having to pay the levels of general taxation that would properly fund the services they have enjoyed. It could not also provide for their retirement, now paid for by later generations of working people. In the absence of a dedicated fund, pensions get treated as a welfare payment, for the avoidance of hardship. It is easy to see why this offends.
A triple guarantee is an odd mechanism. It is the highest of CPI inflation, increase in earnings and a constant increase. Generally, earnings outstrip prices. If that indeed happens, then there is no difference been the triple guarantee and pegging to average earnings. If inflation is eradicated and earnings stay the same, pensions still rise by a compound increase of 2.5 per cent annually. When considering the expense of funding such a scheme, projections were based on single scenarios, comparing the triple guarantee with the previous benchmark of RPI inflation. The most quoted estimate, from the DWP, is £45 billion over 15 years, compared to the costs under an RPI benchmark. Indications are that the scheme will apply to Single Tier pensions of the future as it does to the Basic State Pension of today.
The earnings element is sensible. Since pensions are, de facto, paid by people earning, then they can reasonably increase together. Prices (CPI, in this case) also make sense as an index, although it is harder to justify always awarding the more generous of two. A scenario in which prices and earnings took turns in a spiral would be extremely beneficial to pensioners. As for the guaranteed constant increase, it incrementally increases the relative wealth of the retired every year until someone dares call a halt. That just looks like a bid in an auction of senior votes.
The DWP estimate appears to model a strange scenario. Starting from a basic pensions bill of £72 billion in 2020/21, an extra bill of £40 billion over the next five years can be recreated with a compound increase of 3.5 per cent annually above the alternative scenario, RPI inflation. That seems unduly pessimistic, although costs almost as high are possible if inflation ceases and the 2.5 per cent rule is invoked.
Nevertheless, there is a contradiction in attempts to drive down the smaller sections of the welfare bill while handing out increases to pensioners. Demanding that one generation, paying off student loans and denied housing benefit, wait longer to retire, at the same as increasing the benefits for present and future recipients, makes little sense. In 2011/12, the bill for Job Seekers Allowance was under £5 billion. It sends a very strange message to suggest that that part of the welfare budget is an impossible drain on resources while, elsewhere in the same department, a rule change envisages distributing more than that as an annual surplus just for the asking. Index-linking is a valuable safeguard but one lock is enough.
For a wider-ranging discussion of the whole issue of pensions, see Peter Saunders’ book for Civitas, ‘Beyond Beveridge‘.
Staff from the Contributory State Pensions Analysis Team at DWP have been in touch with helpful detail about the projections. By 2020/21, they model triple-locked pension expenditure as already exceeding RPI-uprated pensions by £4 billion annually. This difference allows for the accumulated gap to open up to a total of £45 billion in the fifteen years 2025/26. By the last year, the annual difference (my calculations) reaches approximately £10 billion at 2012/13 prices, over and above what pensions would cost under an RPI-based award.
Modelling assumptions, and illustrations of impact elsewhere in the system, are set out in the single-tier pensions impact assessment
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254151/a-pensions-bill-single-tier-ia-oct-2013.pdf
specifically appendix A paragraph 16 on page 48.
Projections of government expenditure are almost always wrong because the government statisticians are civil servants first and statisticians second. This leads them to produce over optimistic projections which favour the government. Here is a relevant recent example:
Telegraph
Jobless benefits to be £3bn more than expected
Government forecast cost of benefits for working age people and children would rise by £3.9 billion – but actual figure is predicted to be £7.3billion
Benefits for the unemployed will cost £3 billion more than previously thought Photo: ALAMY
By Peter Dominiczak
11:42PM GMT 20 Dec 2013
Annual spending on benefits for unemployed people and children will rise by £3 billion more than previously thought over the next five years.
The Government had forecast that the sum spent on benefits for working age people and children would rise from £94.2 billion in 2012 to £98.1 billion in 2018 – an increase of £3.9 billion.
But since the Autumn Statement ministers have been forced to revise their figures. They now predict that benefits spending will rise from £94.3 billion last year to £101.6 billion in 2018 – an increase of £7.3 billion.
Nigel Williams does not seem to understand how the benefits system works. It is structured so that a certain level of income is received one way or another. If you lose out on one benefit, you make up part or all of the the deficiency on another.
If the State pension rises less slowly then the amount swallowed up by pension credit for those with little or no income bar the state pension and no substantial savings will rise, as will housing benefit and council tax benefit for those with little income who rent. As the majority of pensioners have no .substantial savings or a pension other than the state pension, the overall amount of money the taxpayer would have to cough up is unlikely to radically change if the uprating of the state pension is put on a footing which results in lower increases.
There is even a potential loss for those with more generous pensions and savings who pay income tax after retirement age. If the state pension rises more slowly, this group will pay less income tax.
To make any significant savings on pensioners, the whole pension and benefits system would need to be radically altered.
Information on caseloads for, for example, State Pension and Pension Credit is available for the DWP at http://83.244.183.180/100pc/sp/tabtool_sp.html and http://83.244.183.180/100pc/pc/tabtool_pc.html.