The Triple Lock and the Trilemma

The media's framing of the possible suspension of the pensions "triple lock" has been varied, ranging from the Guardian's claim that its a penny-pinching initiative of the Treasury to the Telegraph's claim that it would be a "stealth tax raid", which isn't a phrase you often hear them use in connection with a benefit cut. The uncertainty over motive and timing suggests kite-flying, not so much for the intention to suspend or alter the triple lock ahead of the general election, but to see if they can get away with a refusal during next year's campaign to commit to it, and it looks like there is a cross-party consensus on that which has led to an informal agreement. As Chris Mason of the BBC rather artlessly put it: "Neither the Conservatives nor Labour have committed to keeping the triple lock come the next general election. ... I suspect that if the Conservatives keep it, Labour will too. If the Tories tweak it, Labour may well follow suit." (Clearly the BBC has learnt little from Laura Kuenssberg's catastrophic stint as a stenographer).

In the postwar era, the UK relied on widespread and generous occupational pension schemes, typically with defined benefits, to top-up the relatively ungenerous state pension, though this inevitably meant that pensioner poverty, among those who lacked such secondary pensions, was often acute. The late-70s marked an inflexion point as the basic state pension started a steady decline relative to average wages.  The introduction of the triple lock has helped arrest that decline, but the basic state pension (BSP) remains historically low (scoring poorly in international comparisons) and is unlikely to significantly better the position as a percentage of national income it reached in 1980 (just under 5%) despite the future growth in the pensioner population. This is because the instinct of the state, which has been there since the original Old Age Pensions Act of 1908, is to minimise the cost, either through means-testing, increased employee contributions (the original 1908 pension was a non-contributory scheme), pushing back the state pension age (SPA), or by failing to upgrade payments in line with wages. The result is a state pension system that is complex and subject to significant variations in outcome, which leads to the demand for further complex adjustments that introduce new problems.

This desire to penny-pinch has been countered by a political impetus towards fairness. This was particularly notable in the way that the BSP was introduced as the successor to the 1908 provisions in 1948. The proposal outlined in the Beveridge Report had been for a flat-rate pension, sufficient to lift people above absolute poverty, funded by lifetime contributions. The problem was the expectation that people who had suffered during the depression of the 1930s and then contributed to the war effort would also enjoy the pension, despite not having made contributions during their working lives. The consequence was that the BSP was not a funded system (i.e. where you take out what you put in, allowing for investment growth and actuarial evening across the population) but was in effect a "pay-as-you-go" system in which current employee contributions funded current pensions. The problem this stored up was that as the pensioner population grew as a percentage of the total population, either pensions would have to decline relative to wages or contributions by current workers would have to rise, neither of which was politically palatable. In part, pushing back the state pension age has been a compromise to avoid this choice.

The solution arrived at by the late-70s was to let the value of pensions decline through inflation, by removing the earnings link, but to offset this by encouraging greater private provision among better-off workers (as part of the wider move to financial deregulation), offering higher pensions through increased supplemental contributions (e.g. SERPS and later the State Second Pension, aka S2P), and introducing additional means-tested benefits for poorer pensioners (e.g. Income Support, Pension Credit, the Winter Fuel Payment). The repeated tweaks to the system reflects the state's reluctance to properly grasp the nettle, a failing that has been there since 1948. In this context, the triple lock was another attempt to kick the can down the road while implicitly acknowledging that the demise of occupational pensions for all but a minority meant that the state would have to shoulder more of the burden in future. It's clear the majority of working people aren't going to make adequate provision through personal pensions (it turns out that time preference - that current goods have greater utility than future ones - really is a thing), those in precarious work cannot afford to make supplemental contributions, and the perma-austerity of our political consensus means that benefits will inevitably fail to plug the gaps.

While many attribute the triple lock to a purely political calculation - i.e. securing the votes of the over-60s - and others have seen the shift from defined benefits to defined contributions as pushing risk onto employees following the pension fund scandals of the 1980s, another way of thinking about it is as the transfer of an overhead on capital (employer contributions) to a combination of the taxpayer-funded state and the individual. The reason why capital was prepared to fund generous occupational schemes in the postwar era was not an altruistic desire to make up for the modest BSP but an imperative to attract and retain workers in a tight labour market. There is a parallel here with the US, where employers have long had to offer generous health insurance to secure workers of the right calibre. The introduction of the Affordable Care Act in 2010 is an example of transferring that burden from capital onto the individual and the state. In effect, the pensions triple lock, which was also introduced in 2010, was the British Obamacare - just less contentious.

But while the welfare balance between the state and capital has shifted over time, it's clear that there has also been a change in the balance betwen the state and individual. This is due to a combination of poor private pension performance and growing inequality, placing an ever greater burden on the state. In practice that means a greater burden on today's workers, not only because of the pay-as-you-go nature of National Insurance but because the tax regime continues to favour wealth over income. This gets to the nub of the matter. If we think about it, the UK actually does have a national pension fund - i.e. a quantum of wealth, invested in assets that have historically delivered above-average growth returns, that many people anticipate will fund their retirement. It's just not in the intangible form of an electronic ledger. It's in the concrete form of bricks and mortar - in other words, property. Equity release is simply the modern equivalent of buying an annuity. The political problem is that pooling this fund for the benefit of all pensioners, including those who never owned their own home, would be inflammatory.

As many people point out whenever the issue of "pension generosity" arises, particularly in its current guise of the triple lock, the main beneficiaries are always going to be today's young, not today's old. This is because they can look forward to a full post-working life on a level of pensions that has grown relative to average wages over time. Of course there are some assumptions in this, notably that the state pension age is not pushed out even further while average lifespans remain static or even decline, and that other top-up benefits aren't reduced or even abolished. But the biggest caveat is that the current and future cost of state pensions must be paid by current and future workers. In other words, the fact that today's young can currently look forward to better pensions in the future not only ignores time preference, it assumes that the future labour force will be sufficent in size, and sufficiently well-paid relative to national income, to service a potentially much larger pensioner population. That seems optimistic, to say the least.

The obvious solution is equity release, in the form of increased taxation on property (and wealth more generally) to transfer funds to pensioners and thereby redistribute from rich to poor. This would also allow the burden on current and future workers to be reduced. Many people have long argued for National Insurance to be combined with Income Tax, but this is simply another way of saying that we should drop the pretence of a contributory welfare system and fund all benefits, from unemployment and disability to pensions, from general taxation. Limiting our ambition to having income tax do more of the heavy lifting misses that it already does a lot because we have failed to properly tax wealth, and in particular property. The classic poverty relief trilemma is that removing poverty without disincentives at low cost is impossible: you can have two but not all three. In the context of pensions: a flat-rate, generous BSP would be costly, while means-testing would disincentive supplemental private provision. The result is the acceptance that poverty for some is necessary. This is obviously an ideologically-coloured view: the persistence into retirement of the utility of the reserve army of labour.

Shifting the cost of pensions from workers to property has the advantage that it isn't going to disincentivise property ownership, in the same way that taxing land is reliable because landowners aren't going to abandon it (and obviously can't offshore it). The original sin of pensions in the UK was the idea enshrined in the Beveridge Report of the contributory principle, a regressive turn when you consider that the original 1908 pension, however ungenerous, was a non-contributory right. This principle turned out to be a carefully-cultivated myth that obscured that pensions were still dependent on general taxation. The subsequent sin was the turn after 1979 towards a tax regime that privileged wealth over income and increased regressive consumption taxes (e.g. VAT). The triple lock is likely to be tweaked at the very least after the next general election, by whoever happens to be in government. The cross-party consensus is not simply that it is unaffordable in the long run but that any changes to the pension regime must maintain the principle of pay-as-you-go, because to ask who should pay other than current workers would be to open a whole new can of worms.