By Senior Campaign Agent Alasdair Fraser
Pensions are set to return as a defining issue this June as Britain returns to the polls three years early. While Prime Minister Theresa May has come under intense pressure to scrap the controversial ‘triple lock’ on pension increases, Labour’s Jeremy Corbyn has assured voters that his party will protect pensioners’ incomes. Whichever party you support, it is important to understand this critical issue.
Pensions and the elderly
Figures from the Institute for Fiscal Studies show that in fiscal year 2015-16 government spent £217 billion on benefits and tax credits in, £92.1 billion or 42% of which was spent on state pensions. Additionally, between FY 2010-11 and 2014-15, government spending on pensions grew 25%.
Caused by a phenomenon called population ageing, this trend is set to continue. The effect of population ageing on pensions can be seen most clearly in the form of a real example. A 65-year-old today can reasonably expect to live in retirement for over 20 years, meaning today’s retirees will draw their pension for around a quarter of their lives.
However, the problems do not stop there. Britain’s ageing population also has dire consequences for health and social care. Across the UK, the National Health Service (NHS) and local authorities are struggling to provide adequate care for the elderly in the face of budgetary shortfalls. In many cases, this has led older people to sell their homes so they can afford care with the problem expected to persist. A fundamental aspect of this is that Government has chosen to defer recommendations made by the coalition-backed Dilnot Commission’s for a cap on individuals’ social care costs until 2020.
What is the ‘triple lock’?
Introduced in 2011 by the Conservative-Liberal Democrat coalition, the triple lock on pensions is the current mechanism the government uses for ‘uprating’ the Basic State Pension (BSP). It guarantees an increase in the state pension every year by whichever is greater of the Consumer Price Index (CPI) (inflation), growth in average earnings, or a minimum of 2.5%. The lock, which is set to continue until 2020, was established to stop the value of the state pension being eroded by rising costs of living and protect it from unnecessary increases. Essentially, allowing pensioners a static level of purchasing power, meaning they do not need to worry about inflation limiting what they can afford. However, the formula, criticised at the time for being a ‘bribe’ for elderly voters, costs the government billions of pounds per year. With a general election looming, its survival is not guaranteed.
Before the introduction of the triple lock, state pensions increases were linked to the Retail Price Index, which tends to grow at a lower rate than average earnings. This meant that before 2011, the BSP was falling by a percentage of average earnings. However, under the current system pensioners are relatively better off than they ever have been. This is projected to change though, with the independent Pensions Policy Institute (PPI) finding that automatic enrolment with pensions and the triple lock did not cancel out the increase in retirement age. In other words, individuals between 56 and 60 now face lower incomes on retirement than today’s pensioners. Put simply; current retirees are reaping most of the benefit of the triple lock, while younger people will only benefit from automatic enrolment.
The problem of funding pensions is likely to get worse with time. Reports from last year showed that the triple lock could increase the cost of state pensions by more than a third over the next three decades, with a 2.5% increase due in April 2017. Put another way, the triple lock, if kept, would increase the cost of providing a state pension from 5.3% of gross domestic product (GDP) to 7.2% by 2046, according to PPI.
However, the Work and Pensions Committee has said that continuing with the triple lock would be “unsustainable” and “unfair” to younger working people. It argues this is because the Conservative government has made cuts to benefits elsewhere to fund the increases in pension spending. Instead, the committee suggests pensions should be linked to earnings, with a formula in place to protect pensioners’ spending power when earnings lag behind inflation. The Financial Times (FT) suggested a similar approach in a recent editorial. They argued that the triple lock on pension increases has tied up about £6 billion of much-needed cash. These funds, they believe, should have been spent addressing the social care crisis. Furthermore, the FT suggested that the prime minister should reduce the promise to a double lock, removing the 2.5% commitment.
It’s up to you!
Whether you are a pensioner now or not, changes to the way we provide sustainable pensions will likely have a significant impact on your lifestyle later in life. Similarly, the long-term strategies concerning the ageing population that are developed over the next decade will directly affect the livelihoods of millions of young people today. As such, it is imperative you people understand what the various parties are promising regarding pensions. Watch the campaigns closely over the next six weeks; they could decide how you live out your twilight years.
Image rights: Howard Lake @ Flickr