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Pensioners, don’t weep for the triple lock – you’ll do almost as well from the double one

May 19, 2017

The demise of the triple lock may mark a turning point in the politics of social security, by breaking the spell that has prevented pensioner benefits from being touched while working age ones are savaged. But in itself, it changes very little.

For 30 years up to the present decade, the state pension was linked only to prices. This prevented it from keeping up with rising living standards, and the introduction of an earnings link from 2012 was widely welcomed. Retaining a second guarantee that pensions would also keep up with prices has turned out to be at least as important, over the past few years when, unprecedently in the postwar period, inflation outstripped earnings growth for a sustained period. The third guarantee, that if both earnings and prices rose slowly, the pension would rise by at least 2.5%, is an irrational relic of the outrage in 1999 when the pension increased by only 75p a week because of slow inflation.

In practice, this third guarantee has made very little difference to the pension level – I reckon about £2 a week in total  – and its abandonment in the Conservatives’ new double lock may make no difference at all if earnings forecasts are correct. Only in the most sluggish economic conditions do both price and earnings growth fall below 2.5%. As shown in Figure 1, even in our economically grim recent past this has only once made a substantial difference to the uprating applied (in 2015, based on slow earnings and prices growth the previous year).

Figure 1 Determinants of the triple lock and rise in state pension, 2011-17

(Left-hand scale weekly pension level. Right-hand scale percentage growth applied to pension increase, shown in bars, which reflect prices/earnings growth in the preceding year)

3pl lock

The bars on the graph show the three determinants of the triple lock in each year, with a label showing which was invoked as the highest of the three criteria. Early in the period shown, inflation was the main driver; more recently, modest earnings growth has had an effect.

The most important thing to note about this graph is that over the period as a whole, pensions have gone up considerably more than than either prices or earnings. This is because of the “ratchet” effect of pensions always rising by the most favourable criterion in a given year. It treats pensioners more generously than the designers of the policy just over a decade ago ever imagined, since earnings had rarely risen more slowly than prices up to then.

A policy truer to these original intentions would make sure that pensioners did not become worse off year to year, through an inflation link, enhanced by a supplement in periods of earnings growth. This supplement could take the form, for example, of a top-up to ensure that over any five-year period pensions had not fallen behind earnings. This would still stop pensioners from becoming worse off either in absolute terms or relative to working people. But it would end a formula that has made them systematically become better off in relative terms.  A double lock will in all probability continue to do so.

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