The Triple Lock: An 8% rise is justifiable

The Government appears to have forgotten why, the predominantly Conservative, Coalition Government introduced the “triple lock” whereby the State Pension increases in line with earnings, prices or 2.5%, whichever is the greatest.

It was an attempt to reverse the 30 years of erosion since Margaret Thatcher replaced the “earnings link” with a “prices link”. And after only ten years there is a long way to go to restore the pre 1980 relative value.

Prices are about the cost of static living. Earnings are about the standard of living and quality of life. As the economy grows so too do the expectations and necessities of life. For example, very few people had fridges in 1950; it would be difficult to manage without one today.

Over a ten-year period, pensions linked to CPI increased by 26.6% when had they been increased by RPI they would have gone up by 32.4% and had they been increased in line with average earnings they would have gone up by 41.7%. So, one can begin to see the extent of the erosion between 1980 and 2010.

Britain has one of the lowest State Pensions in the developed world at just 29% of average earnings with the official definition of poverty being anything less than 60% of median household income. Britain’s 29% compares with 100.6% in Holland, 94.9% in Portugal, 93.9% in Italy, 91.8% in Austria, and 81.8% in Spain.

There are 1.9m older people living in poverty in Britain today many of whom were forced into retirement and condemned to spending the rest of their lives in poverty. Redundancy has been shown to have a more lasting debilitating effect than either bereavement or divorce and forced retirement was like redundancy only more so as there was little hope of more work. Therefore, it was hardly surprising that prior to the abolition of the “default retirement age”, by the Coalition Government in 2011, there was so much depression amongst older people. There is also a correlation between income and demand upon the NHS, in all age groups, so it is hardly surprising the 4/5th of the expenditure of the NHS goes on older people. And over the past year older people have lost their free TV licence which was effectively a cut in income.

Therefore an 8% rise in the State Pension, if that is what it works out at, would be entirely justifiable given the intention of the “triple lock”.

* Chris Perry is a former Director of Social Services of South Glamorgan County Council, a former Non-Executive Director of Winchester & Eastleigh Healthcare NHS Trust and a former Director of Age Concern Hampshire.

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35 Comments

  • Barry Lofty 9th Jul '21 - 11:05am

    Thank you Chris Perry for this article and reminding the public that the UK has one of the lowest state pensions in Europe, not a good advert for a supposedly democratic and civilised country. After the leaked statements regarding the value put on the lives of the older generation during the early stages of the pandemic, I suppose we should not expect much else from this government. Perhaps the Chancellor could dip into his and his wife’s private fortune to help out the economy?

  • Chris Perry 9th Jul '21 - 11:56am

    Not sure how the Government calculate that earnings have gone up by, or will go up by, 8 per cent this year: as that is clearly not the general perception. However, if that is the case then so too should the State Pension: with or without the “triple lock” – which was about reversing 30 years of erosion. And £14 per week can hardly be described as a “huge” rise?
    It is thought that one of the reasons Dominic Cummings wanted to leave Europe was that he did not consider British pensions to be sustainable and thought pressure would be brought to bear to raise them in line with Europe.

  • Suspect the P M will overule the Chancellor on this one.
    Our resuls yesterday were pretty abject, East Devon you could say awful. Greens, Tories and Labour done okay.

  • John Marriott 9th Jul '21 - 12:24pm

    I should declare a pecuniary interest as both my wife and I are recipients of a state and occupational pension. We have been lucky in terms of health and finance and we are in a good place. I appreciate that not all pensioners can say that. However, over the past decade or so, both of our pensions have more than kept pace with most indexes. So, from a personal point of view, I see no reason why the triple lock on the state pension should stay in place for ALL pensioners. Perhaps it should stay in place only for those who are just reliant on this benefit.

  • Paul Barker 9th Jul '21 - 12:30pm

    As someone living on the State Pension it feels quite generous to me, certainly more than I “need”, I know that is true because I keep saving money without trying.
    The problem here is that we are thinking in the Past, not the likely Future. We are mostly living longer & simply to stand still we would have to raise the Pension Age must faster than we have been doing.
    At a time when inflation is in the 2-3% range, to raise Pensions Permanently by 8% is to add to the problems of Future Governments & Society & also makes it harder to deal with the Real problems of our Pensions System, its massive inequality & failure to direct help where its most needed.

  • Barry Lofty 9th Jul '21 - 12:45pm

    I do not think it is too much to ask that a country that prides itself on being a leader on so many fronts and also a pretty wealthy one, cannot look after its senior citizens in a more passionate way, after all every generation would hope to live to enjoy a reasonable standard of living in their latter years and compared with other similar countries our pension does seem pretty low! My wife and I enjoy a reasonably comfortable life style but without the state pension it would be far less tolerable.

  • Peter Martin 9th Jul '21 - 12:52pm

    @ Chris Perry,

    “Not sure how the Government calculate that earnings have gone up by, or will go up by, 8 per cent this year”

    It’s because earnings fell last year due to the lockdown. So if , for example we had an index of earnings in the following years as:

    2019: 110
    2020: 100
    2021: 108

    We have that earnings have risen by 8% from last year even though they have actually fallen over the two year period.

    This situation probably wasn’t foreseen when the rules of the triple lock were set out.

  • PM will surely over-rule Sunak, the consequences of retirees voter reaction probably acute, will not be forgotten at the next General if he doesn’t.

  • @Paul – Are you living wholly on state pension or is it just one of your pension pots?

    A problem I suspect many have is their pension and thus contributions have been calculated on the assumption of a much higher state pension than it is today.
    It really irritates me that several of my defined-benefit pots include the state pension in their annual statement of benefits payable under the scheme; making it harder to work out just how much pension in total I am likely to receive (both assuming company’s remain solvent and if the schemes are wound up – a sum that is currently circa 38% of what I’m entitled to).
    So the state pension is either going to be the icing on the cake, or a major component of my pension…

    Personally, given the continued lowing of the caps on total size of pension pots and the low annuity rates, those with defined contribution schemes are likely to welcome a higher state pension.

  • Chris Perry makes a valid case that an 8% rise in the State Pension, if that is what it works out at, would be entirely justifiable given the intention of the triple lock to reverse the 30 years of erosion of pensions against average earnings.
    According to the FT the value of the state pension peaked in 1979, when it was 26 per cent of the average UK wage falling to 15.8% by 2008 under Blair/Brown https://www.ft.com/content/6f8531d6-ddfd-11e4-8d14-00144feab7de
    The triple lock uses September’s inflation figure but July’s average earnings number, and this week the UK’s public finances watchdog, the Office for Budget Responsibility, warned that the latter could trigger a £3 billion bill.
    Average earnings figures are temporarily being distorted by furlough, lockdown job losses and a comparison to pay cuts in the depths of the crash a year ago, meaning that average wage growth is currently coming in at a high level and rising.
    Annual wage growth climbed to 5.6 per cent in the three months to April, according to the latest official figures, and the crucial three months to July figure could hit 8 per cent.
    Under the triple lock deal struck by the David Cameron government, maintained by Theresa May, and renewed as a pledge in Boris Johnson’s Conservative manifesto, this means the state pension should go up by that same amount – delivering a potential rise to £194 a week.
    The £3bn for pensions is in addition to an extra £10bn per year needed immediately for ongoing “pandemic legacy pressures”, including £7bn for the NHS, around £1bn per year for catch-up schooling and an extra £2bn annually for the railways, whose budgets have been battered by a collapse in passenger numbers.The figures come from the OBR fiscal risks report. The report identifies climate change and the cost of the transition to net zero as a major fiscal risk in the coming years as well as the already vast level of debt accumulated by the government and the danger of higher borrowing costs https://news.sky.com/story/the-obr-has-put-a-price-on-the-governments-net-zero-ambitions-and-it-will-make-you-shiver-12350313

  • Remember this is more a policy for young people than pensioners.

    Young people will have to put more into their own pension provision to compensate if it doesn’t go up by earnings.

    We do still have one of the worse state pensions in Europe despite the Lib Dem improvements.

    The stats quoted in the article are wrong, I believe. I think the correct way of looking at is that earnings drop by that about compared to your last day of working as there’s a low earnings related component to the state pension compared to other countries but they pay for that in higher “national insurance” type payments related to earnings. Money in the UK which can be put into private pension provision.

    The number of pensioners in relative poverty (less than 60% of average earnings) has fallen dramatically in recent year & will be (virtually) eliminated by the new state pension introduced by the Lib Dems pension minister Steve Webb. Indeed it was increased to the relative poverty level & then the lock means it increases at least by earnings. As if you don’t increase it by earnings then pensioners drift back into relative poverty.

    There was deliberately built in with the triple lock a slight uplift over time because there’s a floor of 2.5% or inflation. Again this benefits younger people more than today’s pensioners But people’s NI contributions went up to pay for it & by about 2050 it was only estimated to cost an extra 1% of GDP – and that won’t actually be much affected even if it is a bumper increase this year.

    The effect that there would be a slight drift up over time was foreseen – because there will be years of recession when earnings don’t increase. And you need to increase by earnings by definition if pensioners are not slip back into relative poverty. The argument should really therefore be about the other two locks – not earnings but 2.5% or inflation. As I say I think this is justifiable because we are now paying more for our pension so over time there should be the moderate increase that the locks provide.

    @John Marriott. The point about giving it to all is that firstly everyone pays in. You also get into the tangles that happened with pension credit – a higher pensions for the poorest. Good but it meant that those that had scrimped and saved to get a small private pension found that they were now no better off than if they had blown it all. So pension savings credit was introduced. And so you go on….

  • Chris Perry 9th Jul '21 - 1:59pm

    It is not the “triple lock” which is under threat but the “earnings link” itself.
    Clearly the 8 per cent is very misleading and this is what should be brought into question and not it’s impact on pensions.
    The restoration of the “earnings link” to the State Pension and “abolition of the default retirement age” were major Lin Dem successes when in the Coalition Government. If Lib Dems will not take pride in their own achievements and back their own policies to the hilt – who will?
    Even at 8 per cent, £14 per week is not a huge increase and will still leave Britain well behind much of Europe in terms of pension provision. Surely everyone should support a higher State Pension as it is the one benefit everyone hopes to receive.

  • Peter Watson 9th Jul '21 - 2:28pm

    “Britain has one of the lowest State Pensions in the developed world at just 29% of average earnings … Britain’s 29% compares with 100.6% in Holland, 94.9% in Portugal, 93.9% in Italy, 91.8% in Austria, and 81.8% in Spain.”
    At the risk of revealing my gross ignorance, how is a state pension that is 100% of average earnings even affordable? (I fear I might be opening up a potential discussion between Messrs. Martin & Bourke that will fly way over my head! 😉 )
    Also, a quick Google suggests that the state element of the Dutch pension scheme provides payments of up to 70% of the minimum net wage (or up to 50% each for a couple), so are we really comparing like with like here?

  • Peter Watson,

    the House of Commons have recently produced a comparative report https://commonslibrary.parliament.uk/research-briefings/sn00290/
    “According to an OECD analysis published in 2019, the UK has an overall net replacement rate of 28.4% from mandatory pensions for an average earner (well below the OECD average of 58.6% and the EU average of 63.5%). When voluntary provision (mainly workplace pensions) is included as well, the UK’s net replacement rate rises to 61.0%, while the OECD and EU averages rise to 65.4% and 67.0% respectively.

    The UK devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies. Income from occupational and personal pensions is a relatively important source of pensioner income in the UK, in contrast to many other countries where state provision (financed either through social insurance contributions or general taxation) is dominant.”

  • John Marriott 9th Jul '21 - 3:44pm

    It may indeed be true that state pensions are higher in other European countries. Isn’t it the case that direct taxation is generally higher as well. Many pensioners have quite frankly never had it so good. Is it time for a rebalancing act?

  • Good article, but I can’t help but consider that this increase has come at a time when the government is cutting universal credit by £20.

    A cynic might think the Tories were impoverishing the (often working) poor to finance their fairly affluent voter base. Over 65 year olds have never been more affluent, with 1 in 5 being sterling millionaires and 75% or so owning their own homes. Intergenerational political divide make this exceedingly toxic.

  • Peter Davies 9th Jul '21 - 4:27pm

    In the Netherlands, the state pension is 70% of the net minimum wage (50% if living with a partner). Your 100% figure for Holland (and presumably the rest of the Netherlands) is mainly made up of employers’ contributory pensions.

  • Peter Davies 9th Jul '21 - 4:42pm

    If the intention is to ensure that the standard of living of state pensioners rises relative to the working population then it would be sensible to make that explicit e.g. by setting the rise at average earnings growth + 1%. The triple lock means that they get no rise most years but a massive hike when there is a big economic shock like Covid. The chancellor would always have the option of giving some of that rise in advance in years like 2020 where there is a sudden but obviously temporary fall in earnings.

  • The HofC report discusses pensioner poverty:
    “The OECD uses a common set of statistical conventions to measure incomes consistently across countries to determine the proportion of the pensioner population in each country living in relative income poverty (defined as having incomes less than 50% of the median).
    …the proportion of people aged 66 and over living in relative income poverty varies widely. In the UK it was 14.9% in 2018, the 13th highest out of the 33 OECD countries for which data is available for 2016-2018. The highest rate was in South Korea (43.4%), followed by the Baltic states of Latvia (39.0%), Estonia (37.6%) and Lithuania (25.2%). Rates were lowest in Denmark (3.0%), Iceland and the Netherlands (both 3.1%) and France (4.1%).
    The OECD’s figures for the UK differ from the DWP’s own measure of households in relative low income, published in the annual Households below average income (HBAI) publication. According to HBAI, the percentage of pensioners in the UK living in households with income below 50% of the median equivalised net household income was 9.8% in 2018/19 and 11.1% in 2019/20.
    Discussions of relative low income in the UK usually focus on the proportion of people living below 60% of the median income after housing costs – 15.9% of pensioners were living below this benchmark in 2018/19 and 18.1% in 2019/20.

  • Peter Davies 9th Jul '21 - 5:22pm

    “Discussions of relative low income in the UK usually focus on the proportion of people living below 60% of the median income after housing costs” the key here as in so much of UK economics is housing. If you own a house freehold without a mortgage your cost of living is quite low and you can top up your income with equity release. If you rent a flat, you will pay more for fuel, credit etc and living on a state pension is hard.

  • @John Marriott

    While it may seem that pensions concern um… pensioners. Actually this is an issue just as much if not more for younger people.

    If the Government doesn’t put in the earnings increase then I as a working age person have to put more money into my private pension provision to compensate which makes me worse off to get the same pension.

    Arguably more so for younger people as I wouldn’t get the increase on the increase! And actually the overall effect of the triple lock is of greater benefit to younger people than younger people – as it means that over longer and longer periods the pension will be higher and higher in real terms if the triple lock is kept and slightly higher in terms of average earnings.

    Now the changes were complicated but basically the “deal” was that working people would pay more NI for the new higher state pension with the triple lock.

    I think if anything this saved the treasury money in the short-term as it got money in at the start in the form of extra NI but the pay outs came later.

    If it is reneging on the terms of the “deal” – that isn’t as they say cricket. I will go with a lower increase if they will refund me my NI so I can buy the pension increase myself!

    As I said the increase in cost as a percentage of GDP in about 2050 is only 1% more – including circumstances like these – more than affordable.

    There may be an argument for the earnings element to be averaged out as @Peter Davies argues but if they don’t pay the increase then the pension won’t be increasing by earnings as promised for our extra NI. And its likely that a big increase in earnings will be followed by sluggish earnings growth.

    Now it may well be that the treasury will make a saving in the next few years as there is a minimum increase of 2.5% whatever inflation or earnings is.

    But it looks as if inflation will be 3% for a little while. If inflation was at its target of 2% (and say earnings are 2%) then 2.5% would have been a real terms increase of inflation plus 0.5% – but 3% is just a real terms increase – saving the treasury 0.5% increase effectively. I suspect that they will keep quiet about that!

  • Barry Lofty 9th Jul '21 - 6:24pm

    For all the experts and the figures thrown out it still seems to me that it is just plain wrong and mean to play games with the state pension when they seem able to throw money around like confetti on headline vanity projects ?

  • Laurence Cox 9th Jul '21 - 7:15pm

    @Michael1
    “The number of pensioners in relative poverty (less than 60% of average earnings) has fallen dramatically in recent year & will be (virtually) eliminated by the new state pension introduced by the Lib Dems pension minister Steve Webb.”

    The New State Pension is only applicable to those who retired on or after 6th April 2016. Those who retired earlier will remain on the much less generous Basic State Pension for the rest of their lives. Those pensioners who are already in poverty, mainly elderly women, will largely remain in poverty as this year’s exceptional increase is unlikely to recur. As it stands, pensioner poverty will only disappear when they die off; an attitude that I hope no Liberal would espouse.

  • Barry Lofty 9th Jul '21 - 7:58pm

    Laurence [email protected] Your last sentence says it all and I share your hope!!

  • Jenny barnes 10th Jul '21 - 7:40am

    As they managed a large number of deaths among pensioners by inter alia discharging untested patients into care homes, the money saved there would cover some of the rise.

  • James Fowler 10th Jul '21 - 9:34am

    I take issue with triple lock on several grounds. 1. Specifically, it is not equitable for public sector workers to have had significantly lower pay increases than state pensioners over prolonged period. The NHS 1% rise when compared to the proposed 8% is breathtaking. This glaring and outrageous discrepancy is not ‘solved’ by advocating an 8% rise for all NHS staff.
    2. Generally, it is not equitable for one sector of the population to have a long term one way ratchet built into their incomes supported by a transfer payment from everyone else. Yes, some pensioners are poor. So are a very large number of workers.
    3. It is noticeable that when many current pensioners were working in the 1980s, the link between pensions and earnings was broken; part of a package of measures that coincided with tax cuts for workers. Now, coincidentally, the link is being restored. This pattern of events is disgracefully self serving. First deprive the old, now the loot young – by citing the previous deprivation.
    4. The comparisons to other countries pensions are cherry picked. Of course there are countries where pensioners incomes are closer to the average, just as there ones where they are further away. That doesn’t make that situation necessarily desirable or fair. That depends on how those schemes are funded.
    5. The justification that big rises in pensions now will benefit the young in 30 years time is little more a post dated cheque drawn on a crashing bank. Pensions now are paid by workers now. Pensions then will be paid be workers then. Their real value can, and will, easily fluctuate in real terms. The young need, and deserve, the money they earn now. Exchanging their money for a vague and totally unenforceable promise that it might be paid at the same level that they are sustaining by someone else in 30 years time is a confidence trick being perpetrated by the old on the young.

  • Why does there have to be a conflict between old and young, after all if they are lucky the young will be old one day so it seems to me that the two sides should get together and find an equitable solution to the problem and for governments to be honest with the population, you can live in hope, what is your answer to this continual and divisive problem James, because it effects all of us?

  • Barry Lofty “For all the experts and the figures thrown out it still seems to me that it is just plain wrong and mean to play games with the state pension when they seem able to throw money around like confetti on headline vanity projects ?” – That’s not really fair. The Government spends about £100Bn a year on pensions (Estimated £103.6Bn in 2020-21 – see https://obr.uk/forecasts-in-depth/brief-guides-and-explainers/public-finances/). That’s a huge amount – about 10% of all Government spending. And it all has to come from taxes – in the long run, there’s no other way to pay for it, yet strangely I don’t see many of those people who call for higher pensions also clamouring to pay more taxes.

    I don’t know what you consider to be a vanity project, but there is no current project that comes even close to what the Government spends on pensions. Even HS2, the biggest project at the moment will probably be about £100Bn spread over 10-15 years (Pensions are £100Bn EVERY year), and unlike pensions, HS2 is an infrastructure investment that over time is likely to repay for itself in extra revenue etc. so won’t be a drain on taxes. It’s simply not true to say the Government throws money like confetti on vanity projects while playing games on pensions.

  • Simon [email protected] I was self employed for the majority of my life so was well aware of ” putting a bit aside for a rainy day” the same for pensions, you are right people do not like paying taxes but that is the job of government to make decisions for the populace that may be unpopular but necessary, but they usually make the choices that will gain them more votes and popularity in the short term. You may have some cause to disagree with my comment on vanity projects, but they are so irritating in the context of this countrys present economic problems, they maybe long term projects but, might I suggest, so are state pensions.

  • @Laurence Cox

    Most of the women (and others) that you mention should be able to claim pension credit ( £177.10 – single, £270.30 for a couple) basically the relative poverty level plus those that have housing costs can claim housing benefit or support for mortgage interest.

    https://www.gov.uk/pension-credit/eligibility

    @James Fowler

    I think that if you think through this carefully you’ll find most of your points are wrong (except 4).

    If the earnings link is not honoured then younger people will have to take money out of their income & put it into their pension pot to make up the shortfall. As I say working age people are paying more NI to get the new state pension. You can take a view on whether the Government will honour its pledges in 30 years time.

    But the best way to get it to do so is for us (slightly) younger people to insist that it does honour its pledges on the triple lock at the moment. But if you are to keep pensioners out of relative poverty then you have by definition to raise pension by average earnings. The 2.5% minimum is generous. But it stems from when Labour put the pension up by only 50p – and it was thought that was politically unacceptable (not least by us) not to put it up by at least 2.5%.

    Actually as I have pointed out it is affordable – only costing an extra 1% of national income in 30 years time.

    I appreciate the point on public sector pay but it is really a different point. I support decent public sector pay and of course people will point out that under the coalition it went up by less than inflation but that was at a time when taxpayers’ pay – the funder of public sector wages – was going down.

    In general Government has to pay competitive wages or it will find it has no-one left working for it. And it should honour pay review boards’ recommended pay increases. You can also often find that individuals in the public sector get inflation or above inflation rises in their pay even if the headline figure is less as their employers’ can move them up their pay scale.

    But yes – health workers and other public sector workers should have an above inflation increase after all they have done for us during the covid crisis.

  • James Fowler 11th Jul '21 - 6:24pm

    @Barry. Fair retort questioning what would I advocate. It’s pretty straightforward. I see state pensions as important collective goods whose time frame means that they can only effectively be overseen by governments through general taxation. As such they represent a social and financial contract between generations. In terms of their value, they should therefore rise (or fall) roughly in line with society’s collective wealth understood as the wages (and commensurate taxation) on which they depend. Wages up, pensions up. Wages stagnate, pensions stagnate. Wages fall, pensions fall.

  • It seems to me that increases in line with earnings (and prices) should be applied in a similar manner to a fund managers performance related bonus – only applied to new rises above a previous high.

  • Barry Lofty 11th Jul '21 - 7:00pm

    James Fowler @Thanks for your reply and your solution to this on going divisive problem.

  • @James Fowler – that seems a pretty good and fair suggestion that pensions should rise/fall roughly in line with wages. I guess the implication of that though is that the triple lock should be removed, since the triple lock tends to force pensions to rise above wages.

    I wonder if there should be some kind of review to assess whether pensions are actually set at an appropriate level, which might lead to a one-off adjustment, and then thereafter pensions follow wages.

  • James Fowler 12th Jul '21 - 9:13pm

    @SimonR. Thank you! Not sure what the fraction of the average wage the state pension should be. A gut feeling says a band somewhere between 25-33%? A lot depends on the retirement age and the shape of national demographics. I’d be keen to see a relatively low retirement age – otherwise too many people miss out altogether – but with staggered tiers rising the older people become. I don’t think that retirement should be all or nothing, we should assist people in gradually easing out of working life by degrees.

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