Removing the earnings link sets a dangerous precedent that pensioners are a target for cost savings
Basic state pension was worth 26% of average earnings in 1979, fell to 16.3% by 2010 and is now 19% with new State Pension at 24.8%
A comprehensive review of pensioner support is needed, not short-term sudden changes in their protection
It is disappointing to read that the Chancellor plans to abandon the triple lock protection for state pensions and remove the promised protection in relation to average earnings. The triple lock itself is a political construct, but, since 2016, it has become even less effective because it protects the youngest pensioners most and only applies to the old basic state pension, not the other earnings-related parts of the old system such as SERPS and S2P. The element that is most redundant is the 2.5% minimum promise, even if earnings and prices rise by less and yet this seems to be what the Chancellor is considering applying to next year’s pension uprating. I would urge him to think again.
The UK State Pension has long been used as a political football: Different Governments have announced rises or cuts in the levels of protection offered to future pensioners over the years. Before 1979, the basic state pension was required to rise in line with the highest of earnings or price inflation (a double lock), and in that year, the basic state pension was worth 26% of average earnings. In 1979, politicians decided that basic state pension would only rise in line with price inflation, removing the earnings link at a time when earnings were rising much faster. In 2001 there was a political backlash after the furore about a very low state pension increase. So the Government promised it would uprate by at least 2.5% even if inflation was lower than this and introduced Pension Credit for the poorest. However, this still left the State Pension whittling away relative to earnings and by 2010 it was worth just 16.3% of the average earnings level.
Even after years of the triple lock, the state pension is still lower than in 1979 relative to earnings: In 2010, the Coalition Government decided that pension benefits had fallen too far behind other benefits and, with many pensioners living in poverty, it introduced the ‘triple lock’ guarantee to increase state pensions by the best of prices, earnings or 2.5%. Since 2010, the basic state pension has recovered somewhat, but is still only worth 19% of average earnings, while the new State Pension is worth 24.8% (i.e. both still below the 1979 level).
State Pension as a percentage of Net Average Earnings (Source: Pensions Policy Institute)
2020 19% (New State Pension 24.8%)
It is important that we do not keep using pensions as a political target to raid. Stability and protection are so important for our older generations. The triple lock had already outlived its usefulness by 2016 as it was applied to the full new State Pension while only the old basic State Pension was triple-locked, with the other elements tied to prices. So it did need to be reconsidered, but that should take place with careful consideration and perhaps reverting to a double lock, but the 2.5% is an arbitrary figure which is difficult to justify on economic or social grounds.
Abandoning the earnings link sets a dangerous precedent: It sets a dangerous precedent for the Chancellor to abandon the earnings link (which is the legally required uprating for Pension Credit for the poorest pensioners). The nation has a hugely divided pensioner population. Some may be very well-off, but millions are not and the State Pension is less than a quarter of average earnings. The oldest pensioners tend to be the poorest and the majority of these are women.
With the lowest and most complex state pension in the developed world, our pensioners need proper protection: The UK pays the lowest state pension in the developed world. The system is extremely complicated, comprising many different elements. There are many parts to the old state pension, and there are tax-free benefits such as Winter Fuel Payments, free travel, free eye tests, Christmas bonus, and so on. These tax-free elements are worth far more to wealthy pensioners than to the poorest. These separate parts still cost significant sums and perhaps could be rolled into a better state pension, without the add-ons.
A considered careful review of pensioner support is needed, not frequent short-term changes: There is a need for a comprehensive review of all aspects of state support for pensioners, but this should be done in a thoughtful and considered manner, rather than as a knee-jerk reaction to one year’s numbers.