More incoherent policy-making from Theresa May
At PMQs yesterday, SNP’s Angus Robertson put Theresa May under pressure to reassert her party’s commitment to the ‘triple lock’ on state pensions.
The prime minister refused to commit to keeping the triple lock in the Tory manifesto, stating only that ‘pension incomes would continue to increase’ under her new government. This has led to speculation that the government is considering proposing a ‘double lock’ instead.
Currently, the annual state pension increase each year is the highest of inflation, average earnings or 2.5 per cent. Under a double-lock, the minimum increase of 2.5 per cent would be removed.
However, Andrew Hood of the IFS argues that, if you accept that there’s a problem with the triple lock, then the double lock is ‘also a bad idea’.
He writes that the biggest problem with the triple lock is the ‘ratchet effect’.
“Because the state pension grows in line with the highest of earnings, prices and 2.5% in the long run it will increase faster than all of them. This is the reason why the triple lock has such a significant effect on state pension spending in the Office for Budget Responsibility’s long-run projections. Relative to increasing in line with earnings each year the OBR estimates that the triple lock could increase pension spending by 0.8% of GDP in 2060–61, which is equivalent to £15 billion in today’s terms.”
He highlights that scaling back to a double lock would not alter the ‘ratchet effect’.
“The key thing to note is that getting rid of the 2.5% guarantee and moving to a so-called ‘double lock’ would not eliminate this issue. The state pension would still rise faster than both earnings and prices in the long run, and would still eventually become unaffordable.”
The IFS proposes an alternative method, whereby the state pension would be price-indexed only when inflation exceeds earnings growth. Otherwise the increase would be linked to wages. This approach has now been endorsed by the Work and Pensions Select Committee.
Whether one agrees or disagrees with abandoning the triple lock, it’s entirely irrational to replace one system with another without removing the fundamental flaws.
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